Skoda Minotti CPE Day - 2017 (Part 2)

Welcome to the
2015 Annual Meeting
November 2, 2015

Accounting Update
November 9, 2017
Jim Suttie, CPA

3
New Accounting
Pronouncements

4
Effective 2017 - Highlights
• Business Combination Measurement Period Adjustments
• Measurement of Inventory
• Investment Disclosures

5
Measurement Periods
• ASU 2015-16
• The measurement period (AKA look-back) of up to 1 year
requiring restatement if provisional amounts recorded in a
business combination were off, is gone.
• Changes are recorded in current financial statements.
• A line by line disclosure of “out of period” adjustments in the
current year is required.

6
Inventory
• ASU 2015-11
• Changes subsequent measurement of inventory (other than
retail or LIFO) from lower of cost or market, to lower of cost
or net realizable value.

7
Inventory
• Previously, “market” could be defined three different ways,
now just net realizable value (NRV).
• NRV = estimated normal selling price less costs to
complete, dispose, and transport.
• Cannot use the new definition
to reverse a previously recorded
inventory impairment.

8
Investments at NAV
• ASU 2015-07
• The NAV practical expedient
• What is NAV?
• Moves these assets out of the fair value hierarchy
• Required disclosures
• FV measurement and description of the significant
investment strategies
• Terms and conditions of redemption
• Period of time to liquidation (estimate)
• Unfunded commitments
• Any other restrictions

9
Effective 2018 - Highlights
• Balance Sheet Classification of Deferred Taxes
• Nonprofit Financial Statements

10
Deferred Taxes
• ASU 2015-17
• One net deferred tax caption
shown for each jurisdiction as
either a net long-term asset or
liability.
• Might impact financial ratios.

11
Nonprofit
• ASU 2016-14
• Revision of NFP financial statement presentation
• Two columns rather than three – restricted/unrestricted
• Net investment returns – present net of external and direct
internal expenses
• Show expenses by function
• Several new disclosures
• Liquidity
• Allocation methods for expenses

12
Effective 2019 – 2020 Big Ones!
Revenue Recognition
Leases

13
Revenue Recognition
• ASU 2014-09
• Identify and separately account for the delivery of separate
performance obligations.
• Processes, internal controls, IT systems could be affected
• Customer contracts, bonuses/compensation could be
affected

14
Revenue Recognition
Questions to ask:
– Do you have legally enforceable contracts for your sales transactions
(even with related parties)?
– Do customers receive separable “add on” services when purchasing
your product?
• Installation
• Customer support and training
• Extended warranties
– Do your sales contracts ever provide for variable amounts of
consideration?
– Are there typically costs incurred in acquiring a contract?
– For contractors
• Significant amounts of uninstalled materials?
• Are retainage amounts shown as receivables?

15
ASU 2016-02
– ASU 2016-02, Leases
– Creates Topic 842, Leases, in the FASB
Codification
– Supersedes FASB ASC 840, Leases
– Applies only to leasing of property, plant,
and equipment
– Entities that hold numerous equipment and real
estate leases, in particular those with numerous
operating leases, will be most affected by this
new guidance

16
Background
• Existing lease guidance (developed in 1976) was criticized
for failing to meet financial statement users’ needs: Creates
Topic 842, Leases, in the FASB Codification
• Did not always provide a faithful representation of leasing
transactions
• Did not recognize assets and liabilities on the balance sheet
arising from long-term operating leases

17
Background
• The FASB In Focus identified the following key improvements
with this new standard:
 More faithful representation of a lessee’s rights and obligations arising
from leases
 Fewer opportunities for entities to structure leasing transactions to
achieve a particular outcome on the balance sheet
 Improvements in the understanding and comparability of a lessee’s
financial statements
 Alignment of lessor accounting and sale and leaseback transactions with
comparable revenue guidance in the revenue recognition standard
 Additional information about lessor’s leasing activities and exposure to
credit and asset risk as a result of leasing
 Clarification of the definition of a lease to address practice issues within
current U.S. GAAP

21
Highlights
• Operating leases will now be recorded in the statement of
financial position as assets and liabilities
• Retains a distinction between finance leases and operating
leases

22
Highlights
• No more “bright-line” thresholds as
under current U.S. GAAP
 75% life
 90% fair value
 Bargain purchase option
 Title transferred at the end of the
lease term
 FASB ASC 842-10-66-2 notes that
numerical thresholds above are “one
reasonable approach” to assessing
lease classification criteria

23
2016 KPMG Survey
(140 Mostly Public Companies)

24
Highlights
• Requires a lessee to recognize the assets and liabilities that
arise from leases (operating and finance)
• All leases create an asset and a liability for the lessee based
on the definitions of assets and liabilities in FASB Concept
Statement No. 6, Elements of Financial Statements
FASB Concept Statement No. 6
Assets are probable future economic benefits obtained or controlled by a
particular entity as result of past transactions or events
Liabilities are probable future sacrifices of economic benefits arising from present
obligations of a particular entity to transfer assets or provide services to other
entities in the future as a result of past transactions or events

25
Highlights
• For leases with a term of 12 months or less, a lessee is
permitted to make an accounting policy election not to
recognize lease assets and lease liabilities
• If a lessee makes this election, it should recognize lease
expense for such leases generally on a straight-line basis
over the lease term
• Election needs to be consistently applied for similar leases

26
HIGHLIGHTS
• Short-term Lease Example
 Accounting policy elected -will not recognize right-of-use assets and lease
liabilities that arise from short-term leases for any class of underlying
asset, needs to be consistently applied for similar leases
– 12 month lease Option for another 12 months
• Lessee considers all relevant factors, and determines that it is not
reasonably certain to exercise the option to extend
• Because at lease commencement lessee is not reasonably certain
to exercise the option to extend, the lease term is 12 months
• The lease meets the definition of a short-term lease
• Lessee does not recognize the right-of-use asset and the lease
liability

28
Definition of a Lease
• What is a lease?
 Understanding the definition and determining whether a contract is or
contains a lease will be crucial
 Much more extensive than previous U.S GAAP
Previous U.S. GAAP Definition New Definition under FASB ASC 842
An agreement conveying the right to
use property, plant, or equipment
(land and/or depreciable assets)
usually for a stated period of time
A contract, or part of a contract, that
conveys the right to control the use of
identified property, plant, or
equipment (an identified asset) for a
period of time in exchange for
consideration

29
Definition of a Lease
• Key differences in the 2 definitions:
 New definition refers specifically to a contract and includes mention
that a lease can be viewed as only being part of a contract
 New definition specifically includes the term “control” within the context
of the lease
 New definition includes mention of the fact that the lease requires an
"exchange of consideration”
• This definition was changed from the original ED issued in
2010 (which retained the original definition currently in U.S.
GAAP), as respondents noted that the 2010 definition would
result in a significant increase

30
Does a Contract Contain a Lease?
• The FASB noted the following in respect to the determination of
whether a contract contains a lease:
 In most cases, the assessment of whether a contract contains a lease
should be straightforward
 The intention is that a contract will either fail to meet the definition of a
lease by failing to meet many of the requirements or will clearly meet
the requirements to be a lease without requiring a significant amount
of judgment
 The FASB did add more guidance in the final ASU to make it easier for
entities to make the lease assessment for more complicated scenarios
 There is a helpful flowchart in the implementation guidance section of
FASB ASC 842

31
Identifying a Lease
Lease contracts in the scope
of FASB ASC 842 involve
An identified Asset
The right to control the use
during the lease term
That is explicitly
or implicitly
specified
Supplier has no
practical ability to
substitute and would
not economically
benefit from
substituting the asset
Decision-making
authority over
the use of the
asset
The ability to
obtain substantially
all economic
benefits from the
use of the asset

32
Identified Asset
• First step in assessing whether a contract is a lease
 Not determined by the header of the document
• Can be either made explicitly or implicitly
 Concept of an “embedded lease”
 Need to look at agreements for implicitly identified assets
• Substitution rights, where 2 conditions must exist within the contract in
order for a supplier’s substitution rights to be considered substantive:
 The supplier has the practical ability to substitute alternative assets throughout
the period of use
 The supplier would benefit economically from the exercise of its right to
substitute the asset

33
Right to Control Use of Asset
• An entity has the right to direct the use of the asset
throughout the period of use in ether of the following
situations:
 The entity has the right to direct how and for what purpose the asset is
used throughout the period of use
 The decisions about how and for what purpose the asset will be used
are predetermined and at least one of the following conditions exist--
– The entity has the right to operate the asset (or direct others to operate)
throughout the period of use without the supplier having the right to change
those operating instructions
– The customer designed the asset (or specific aspects of it) in a way that
predetermines how and for what

34
Examples of
Decision-making Rights
RIGHTS EXAMPLE
Right to change the type of output Deciding whether to use a shipping
container to transport goods for storage
Deciding on the mix of products sold from a
retail unit
Right to change when the output is
produced
Deciding when an item of machinery or a
power plant will be used
Right to change where the output is
produced
Deciding on the destination of a truck or
ship
Deciding where a particular piece of
furniture will be used or deployed
Right to change whether the out put is
produced
Deciding whether to produce energy from a
power plant and specifically how much
energy to produce from that power plant

35
Service Contracts
Versus Leases
Service Contract Lease
The costumer obtains economic
benefits from the service only as a
supplier performs the service
prescribed within the contract
The lessee continues to benefit
throughout the lease term from the
lessor’s performance of making the
associated asset subject to the lease
available to the lessee
The vendor has a remaining obligation
to perform until it has provided all of
the service to its customer
When a lessor makes available the
asset to be used by the lessee, the
lessor has fulfilled its obligation to
transfer this right-of-use
Customer typically only has an
obligation to pay for the services
provided to date
Lessee cannot simply return the asset
without breaching the contract and
potentially incurring significant
termination penalties
Customer only benefits
when the service is
being performed.
Lessee benefits
continuously
because it has
access to the
leased item

Commencement Date,
Discount Rate, Renewal
Options, Lease Term

37
Commencement Date
• The date on which a lessor makes an underlying asset
available for use by the lessee
• Date on which the lessee is required to measure and
record both:
 The lease liability at the present value of the lease payments not
yet paid, using the discount rate for the lease
 The right-of-use asset

38
Discount Rate
• The rate that the entity uses to discount future lease
payments should be the rate implicit in the lease if it is
readily determinable
• If not determinable, the entity should use its incremental
borrowing rate
Implicit Rate
Incremental
Borrowing Rate

39
Discount Rate
• A lessee may use a single discount rate to apply to a
portfolio of leases assuming the result would not be
significantly different than individual discount rates
Private entities are permitted an accounting
policy election to use a risk free discount rate
for the lease (normally the federal funds rate)

40
Lease Term
• The lease term should be the sum of the non-cancellable
period of the lease along with any periods covered by an
option to extend the lease if the lessee is reasonably
certain to exercise that option as well as any options to
extend that would be controlled by a lessor
Non-Cancellable
Lease Period
Periods Likely
to Extend
Options to
Extend
Controlled by
Lessor

Segregating Lease/Non-Lease
Components

42
Segregating Lease/
Non-lease Components
• Segregating lease and non-lease components:
 Many contracts contain both lease and non-lease components
 ASU 2016-02 provides expanded guidance on how entities should account for
contracts with lease and non-lease components
– Subject to reallocation by lessee (only) upon a remeasurement of lease liability and
contract modification not accounted for as a separate contract (lessee and lessor)
 Will have significant financial reporting consequence since operating leases
are now capitalized while services are not
 There is a practical expedient that allows lessees to account for the non-lease
components together with the related lease components as a single lease
component
– Policy election by class of underlying asset
– Does not apply to Lessors

44
Lessee Accounting Overview
Balance Sheet Income Statement Cash Flow
Statement
• Right-of-use
(ROU) asset
• Lease liability
• Amortization
expense
• Interest expense
• Principal-
financing Interest-
operating
• Right-of-use
(ROU) asset
• Lease liability
• Single lease
expense on a
straight-line basis
• Lease expense-
usually operating
Classification is similar to the classification in FASB ASC 840
Balance sheet presentation- can not present finance leases/operating leases on same
line and must break out each on face or in notes
Income statement presentation- Single lease expense presented in income from
continuing operations

46
Operating Leases
• Lessee accounting for operating leases:
 Recognize a right-of-use asset and a lease liability, initially measured at the
present value of the lease payments, in the statement of financial position
 Recognize a single lease cost, calculated so that the cost of the lease is
allocated over the lease term on a generally straight-line basis
 Classify all cash payments within operating activities in the SOCF
 Variable lease payments (which are not in substance fixed payments) that
depend on an index or a rate (such as the Consumer Price Index or a market
interest rate), initially measured using the index or rate at the commencement
date
– Not updated unless a remeasurement event takes place
– To the extent more payments are shifted to variable lease payments, absent a
remeasurement event, balance sheet right-of use asset and lease liability would decrease

47
Operating Leases Remeasurement
 Lessee shall remeasure lease payments if any of the following occur:
– Lease is modified and not accounted for as a separate contract
– Contingency is resolved such that some or all of variable lease payments now meet the
definition of lease payments (i.e. they became fixed lease payments)
– Change in assessment of lease term (based on what is reasonably certain)
– Change in assessment of whether the lessee is reasonably certain to exercise or not
exercise a purchase option
– Change in amounts probable of being owed by lessee under residual value guarantees
– Lease classification and discount rate are remeasured for:
– Leases is modified and not accounted for as a separate contract
– When a triggering event takes place which causes the lease term or purchase option to
be reassessed

48
Operating Leases Remeasurement
 A lessee shall reassess the lease term or a lessee option to purchase
the underlying asset only if and at the point in time that any of the
following occurs:
a) There is a significant event or a significant change in circumstances that is
within the control of the lessee that directly affects whether the lessee is
reasonably certain to exercise or not to exercise an option to extend or
terminate the lease or to purchase the underlying asset
b) There is an event that is written into the contract that obliges the lessee to
exercise (or not to exercise) an option to extend or terminate the lease
c) The lessee elects to exercise an option even though the entity had
previously determined that the lessee was not reasonably certain to do so
d) The lessee elects not to exercise an option even though the entity had
previously determined that the lessee was reasonably certain to do so

49
Operating Lease Example
Payments of $10,000 annually for five years
Interest rate at 5%
Year Lease
Liability
Cash Paid Interest
Accretion
Right of
Use Asset
Amortization
of Right of
Use Asset
(PLUG)
Straight
Line
Lease
Expense
A B A+B
0 $43,295 $43,295
1 $35,460 $10,000 $2,165 $35,460 $7,835 $10,000
2 $27,232 $10,000 $1,772 $27,232 $8,228 $10,000
3 $18,594 $10,000 $1,362 $18,594 $8,638 $10,000
4 $9,524 $10,000 $930 $9,524 $9,070 $10,000
5 $0 $10,000 $476 $0 $9,524 $10,000
TOTAL $50,000 $6,705 $43,295 $50,000

50
Operating Lease Example
Year Lease
Liability
Cash Paid Interest
Accretion
Right of
Use Asset
Amortization
of Right of
Use Asset
(PLUG)
Straight
Line
Lease
Expense
A B A+B
0 $43,295 $43,295
1 $35,460 $10,000 $2,165 $35,460 $7,835 $10,000
Journal Entry at Inception:
Right of Use Asset $ 43,295
Lease Liability $ 43,295
Year 1 Journal Entry:
Lease Expense (amortization of ROU) $ 7,835
Lease Expense (accretion of lease liability) $ 2,165
Lease Liability $ 7,835
Cash $ 10,000
Accumulated Amortization $ 7,835

52
Finance Leases
• A lessee is required to classify a lease as a finance lease when it
meets any one of the following criteria:
 The lease transfers ownership of the underlying asset to the lessee by the end
of the lease term
 The lease grants the lessee an option to purchase the underlying asset that the
lessee is reasonably certain to exercise
 The lease term is the major part of the remaining economic life of the
underlying asset
 The present value of the sum of the lease payments and any residual value
guarantees by the lessee that is not already reflected in the lease payments
equals or exceeds substantially all of the fair value of the underlying asset
 The underlying asset is of such a specialized nature that it is expected to have
no alternative use to the lessor at the end of the lease term

53
Finance Leases
• Lessee accounting for finance leases:
 Recognize a right-of-use asset and a lease liability, initially
measured at the present value of the lease payments, in the
statement of financial position
 Recognize interest on the lease liability separately from
amortization of the right-of-use asset in the statement of
comprehensive income
 Classify repayments of the principal portion of the lease liability
within financing activities and payments of interest on the lease
liability and variable lease payments within operating activities in
the statement of cash flows

54
Finance Leases
• Some key differences from the previous standard:
 No “bright lines” incorporated into the criteria (however, 75 percent
of useful life and 90 percent minimum lease payment thresholds
are “one reasonable approach” per FASB ASC 842-10-55-2)
 The guidance no longer uses the term “bargain purchase option”
 There are now five capital lease criteria instead of four with the
addition of “specialized nature that is expected to have no
alternative use to the lessor” criterion

55
Lessee Accounting Overview
Statement
• Right-of-use
(ROU) asset
• Lease liability
• Amortization
expense
• Interest expense
• Principal-
financing Interest-
operating
• Right-of-use
(ROU) asset
• Lease liability
• Single lease
expense on a
straight-line basis
• Lease expense-
usually operating
Balance sheet presentation- can not present finance leases/operating leases on same
line and must break out each on face or in notes
Income statement presentation- Single lease expense presented in income from
continuing operations
FINANCE
OPERATING

57
Lessor Accounting Overview
Statement
•Net investment in
the lease-
presented
separately
•Interest income
and any selling
profit on thelease1
•Operating activity
•Continue to
recognize
underlying asset
•Lease income,
typically on a
straight-line basis
•Operating activity
Selling profit is recognized at lease commencement for sales-type leases and over the
lease term for direct financing leases (note: selling profit is rare for direct financing
leases). Special presentation requirements apply. Selling loss recognized at lease
commencement for both sales-type lease and direct financing lease.
FINANCE
OPERATING

58
Lessor Leases
“The accounting applied by a lessor is
largely unchanged from that applied under
previous GAAP.”
-ASU 2016-02, Summary, page 4

60
Related Party Leases
• Related party leases:
 The recognition and measurement requirements for all leases
should be applied by lessees and lessors that are related parties on
the basis of legally enforceable terms and conditions of the
arrangement
 In the separate financial statements of the related parties, the
classification and accounting for the leases should be the same as
for leases between unrelated parties
 Must also apply disclosure requirements of FASB
ASC 850, Related Party Disclosures

61
Related Party Leases
Related party leases:
Account for related-party leases based on legally
enforceable terms and conditions of the lease
Some related party transactions are not
documented or are not “arm’s length”

63
Disclosures
• Both lessees and lessors are required to present both
qualitative and quantitative information about their leases,
the significant judgments made, as well as the amounts
recognized in the financial statements relating to those
leases
• Both lessees and lessors should consider the level of
detail necessary to satisfy disclosure objectives and
appropriately aggregate and disaggregate disclosures in
order to ensure the information is useful to investors

64
Disclosures
• Information about the nature of the entity’s leases to include the
following:
 A general description of those leases
 The basis and terms and conditions on which variable lease payments
are determined
 The existence and terms and conditions of operations to extend or
terminate the lease
• Information about significant assumptions and judgments to
include the following:
 The determination of whether a contract contains a lease
 The allocation of consideration in a contract between lease and non
lease components

65
Disclosures
• Narrative disclosures about the options recognized and not
recognized as part of its right-of-use assets and lease liabilities
• Existence of any residual value guarantees along with the
related terms and conditions
• Restrictions or covenants imposed by leases
• Significant leases that have not yet commenced to include any
construction or design involvement
• Determination of the discount rate
• Election of the practical expedient for not separating lease
components from non lease components

66
Disclosures
• Finance lease cost, segregated between amortization of
the right-of-use assets and interest on the lease liabilities
• Operating lease cost
• Short-term lease cost, excluding expenses relating to
leases with a lease term of one month or less
• Variable lease cost
• Sublease income, disclosed on a gross basis, separate
from finance or operating lease expense
• Net gain or loss recognized on sale and leaseback
transactions

67
Disclosures
• The following amounts segregated between each type of
lease:
 Cash paid for amounts included in the measurement of lease
liabilities
 Supplemental noncash information on lease liabilities arising from
obtain right-of-use assets
– Weighted average remaining lease term and
discount rate
 Maturity analysis separately for both finance
and operating leases

68
Lessor Qualitative Disclosures
• Options for a lessee to purchase the leased asset
including terms and conditions
• Determination of the amount the entity expects to derive
from the leased asset following the end of the lease term
• Information about how it manages its risk associated with
the residual value of its leased assets including:
 Risk management strategy,
 Carrying amount of residual assets covered by residual value
guarantees, and…
 Other means by which it reduces its residual asset risk

69
• For sales-type leases and direct financing leases only:
 Significant changes in the balance of its unguaranteed residual
assets and deferred selling profit on direct financing leases and
 Maturity analysis of its lease receivables
• For operating leases only:
 Maturity analysis of lease payments

70
• Lease income recognized in each annual and interim
period, in a tabular format, to include the following:
 Sales-type leases and direct financing leases:
– Profit or loss recognized at the commencement date
– Interest income either in aggregate or separated by components of the
net investment in the lease
 Operating lease:
– Lease income relating lease payments as well as variable lease
payments not included in the measurement of the lease receivable
• Components of its aggregate net investment in sales-type
and direct financing leases

72
Effective Date And Transition
• Effective date and transition:
 For PBEs, NFP entities that are conduit bond obligors, or EBP plans that file
with the SEC, the amendments are effective for fiscal years beginning after
December 15, 2018, including interim periods with in those fiscal years
 For all other entities, the amendments are effective for fiscal years beginning
after December 15, 2019, and interim periods within fiscal years beginning after
December 15, 2020
 Early adoption is permitted
 Modified retrospective approach, where entities will essentially run off those
leases existing at the beginning of the earliest comparative period presented
 For operating leases, a lessee will present a lease liability in the statement of
financial position at each reporting date equal to the present value of the
remaining minimum rental payments and a right-of-use asset that is derived
from the lease liability

73
Operating Lease
Transition Example

75
Implications
• During the transition, entities should examine their process
to identify lease arrangements and ensure that leases and
related rent are properly disclosed in the notes to the
financial statements. To the extent leases are recognized
as lease assets and liabilities that were not previously
disclosed, users of financial statements may be surprised.

76
Implications
• Absent future change, leverage ratios based on current
U.S. GAAP could be violated upon the adoption of the new
lease standard since liabilities will be increased under
most definitions of liabilities in debt agreements
 Debt to equity increases
 Interest coverage decreases
 EBITDA increases
 Return on assets decreases
 Current ratio decreases

77
Implications
• The new lease standard makes a significant change in
accounting for related party leases by shifting from a
substance based criteria in current U.S. GAAP to
accounting for related party leases based on their legally
enforceable terms
• New processes and procedures will be necessary for
segregating lease and non-lease components

78
Implications
• Leases which embed payments for taxes and insurance in
the fixed lease payment may wish to consider revising the
lease to make these variable (pass-through) otherwise the
payments for taxes and insurance will be capitalized
• EBITDA typically included rent expense, will it include the
new “lease expense?”

79
Implications
• Assess the lease versus buy decision under the new
standard

80
Implications
• Will companies be able to track operating leases via
journal entry or will asset tracking software be needed?
• Will leasing arrangements evolve into services? Will
greater amounts of lease consideration become variable?

82
2016 KPMG Survey
(140 Mostly Public Companies)

83
Contact Me
Jim Suttie, CPA
Principal
(440) 449-6800
jsuttie@skodaminotti.com
CPE Code: ASU

Business Valuation Basics
Sean Saari, CPA/ABV, CVA, MBA
November 9, 2017

85
Learning Objectives
After completing the session,
participants will be able to…
• Understand the basic concepts that need to be
addressed in scoping a valuation engagement
• Recognize the methods typically utilized to
value a business or ownership interest and
understand their basic application
• Identify normalizing adjustments and assess
their impact on value
• Reconcile values derived from multiple
valuation approaches
“In the long run, men hit only what they aim at.” – Henry David Thoreau

86
Agenda
• Valuation Basics
• Case Study / Valuation Analysis
 Valuation Approaches
• Asset Approach
• Income Approach
• Market Approach
• Rules of Thumb
 Control and Marketability Considerations

87
Quote of the Day
“There is no such thing as an absolute
value in this world. You can only estimate
what a thing is worth to you.”
Charles Dudley Warner 1829-1900, American Writer

88
Valuation Basics
• Standard of Value
 Fair Market Value
 Fair Value
 Strategic / Investment Value
• Sales Price = Value?
• Type of Value
Equity Value = Value of Equity Ownership
Enterprise Value = Equity Value + Debt – Cash
Equity Value = Enterprise Value – Debt + Cash

89
Valuation Basics
Cash
Enterprise
Value
Debt
Value
Equity
Value
Market
Value of
Invested
Capital
Reconciling Equity Value to Enterprise Value

90
Valuation Basics
Furnishings
House
Value
Debt
Value
Equity
Value
Total Value
of Home
and
Furnishings
How the Value of Your Home is an
Enterprise Value

91
Valuation Basics
• Valuation Date
 Valuation standards generally
indicate that only information that
was “known or knowable” as of the
valuation date can be considered
 Values can change materially based
on the valuation date used
• Purpose of Engagement
 Important to identify at outset, as the
purpose of an engagement often
drives the standard of value,
valuation date, etc.

92
Valuation Approaches
• Asset Approach
• Income Approach
• Market Approach
• Rules of Thumb

93
Asset Approach
Valuation Methodologies
• Adjusted net asset method
Basic Steps
• Adjust assets to fair market value
• Adjust liabilities to fair market value
Pros
• Provides “floor value” of the company
• Relatively simple analysis
Cons
• Often not indicative of value for healthy
businesses
• May be necessary to obtain fixed asset and real
estate appraisals

94
Income Approach
• Discounted cash flow method
• Capitalization of cash flow method
• Capitalization of earnings / Discounted future earnings
Basic Steps
• Determine benefit stream and make normalizing
adjustments as appropriate
• Determine cash flow adjustments
• Determine discount/capitalization rate
• Discount / capitalize cash flows
Pros
• Provides most “company-specific” value
• Can appropriately incorporate projected growth of the business
Cons
• Most involved of the valuation analyses
• May be disagreements over likelihood of meeting projections

95
Normalizing Adjustments
• FMV vs. Strategic normalizing adjustments
• Compensation
Family members paid other than FMV
Officers paid other than FMV
• Personal expenses
• Related party transactions other than FMV
• Non-operating income or expenses
• Non-recurring income or expenses
• Expense trends

96
Market Approach
• Guideline transaction method
• Guideline public company method
Basic Steps
• Determine benefit stream and make
normalizing adjustments as appropriate
• Find comparable transactions/guideline
public companies
• Calculate valuation multiples and apply
to subject company
• Make adjustments as necessary to
arrive at equity value (if necessary)

97
Market Approach
Pros
• Incorporates market conditions and prices
paid in recent relative transactions
• Easy to explain and apply
Cons
• Can be misleading if debt not appropriately
considered
 EBITDA multiples typically result in an
Enterprise Value, not an Equity Value
• In certain industries, there may be a lack of
comparable transactions or public
companies

98
Rules of Thumb
• Rule of thumb
Basic Steps
• Identify rule of thumb valuation metrics
• Apply rule of thumb to the subject company
Pros
• Simple application
Cons
• Can result in misleading values
• Often lacks support
• Not permitted to be used as a sole valuation
method by most valuation standards

99
Control Considerations
Control Discounts / Premiums
• Two options
 Model in cash flows
 Discreet discount / premium
How are Adjustments Supported?
• Mergerstat Control Premium Study
• Closed-end mutual fund data (for
investment holding companies)

100
Marketability Considerations
Marketability Discounts
• Controlling ownership interest
• Non-controlling ownership interest
How are Adjustments Supported?
• Restricted stock studies
• Pre-IPO studies
• FMV Opinions study
• Option-based models
• Qualitative analysis (e.g. Mandelbaum factors)

101
Summing It Up
After completing the session, participants will be able to…
• Understand the basic concepts that need to be
addressed in scoping a valuation engagement
• Recognize the methods typically utilized to
value a business or ownership interest and
understand their basic application
• Identify normalizing adjustments and assess their
impact on value
• Reconcile values derived from multiple valuation approaches

102
Closing Quote
“Things only have the value that we
give them.”
Moliere 1622-1673, French Actor/Playwright

103
Questions?
Sean Saari, CPA/ABV, CVA, MBA
Partner
(440) 449-6800 x7221
ssaari@skodaminotti.com
CPE Code: BVB

Wrap-up
Mike Trabert
November 9, 2017

10David MacDonald
November 9, 2017

Agenda
1. Securing the IT Environment
2. Managing and Retaining Data
3. Managing IT Risk and Compliance
4. Ensuring Privacy
5. Enabling Decision Support & Analytics
6. Managing System Implementations
7. Preventing and Responding to Computer Fraud
8. Governing and Managing IT Investment and Spending
9. Leveraging Emerging Technologies
10.Managing Vendors and Service Providers

Data Management
• Data management is the development,
execution and supervision of plans,
policies, programs and practices that
control, protect, deliver and enhance the
value of data and information assets.

Benefits of Data Management
• Minimized errors
• Efficiency Improvements
• Protection from data-related problems and
risks
• Data Quality Improvement

Managing IT Risk and Compliance

Risk vs. Compliance
Risk management is predicting
and managing risks that could hinder the
organization to reliably achieve its objectives
under uncertainty.
Compliance refers to adhering with the
mandated boundaries (laws and regulations)
and voluntary boundaries (company's
policies, procedures, etc.).

Gap Analysis
Many companies fail to closely align their IT
risk management plans with their larger
business strategies. Evaluate the risk, then
formulate risk governance and compliance
policies to ensure optimum security for
devices, applications and data.

Privacy
• Internet Privacy
• Consumer Online Privacy
• Social Networking Privacy
• Cell Phone Privacy
• Email Privacy
• Cybersecurity
• Location Tracking
• Privacy at Borders and Checkpoints
• Medical and Genetic Privacy
• Surveillance Privacy
• Consumer Privacy
• Workplace Privacy
• National ID

U.S. Constitution
• The government argues that the Fourth Amendment protects
information that you keep in your desk, but not information that you
keep online, like old emails or pictures.
• The Fourth Amendment (Amendment IV) to the United States
Constitution prohibits unreasonable searches and seizures and
requires any warrant to be judicially sanctioned and supported by
probable cause.
• The fact that technology now allows an individual to carry such
information in his hand does not make the information any less
worthy of the protection for which the Founders fought.”
—U.S. Supreme Court Chief Justice John Roberts in Riley v.
California (2014)

Understanding Privacy
1. What personal information about customers and employees does the
organization collect and retain?
2. What personal information does the organization need and use in carrying
out business—for example, in sales, marketing, fund-raising, and customer
relations activities?
3. What personal information is obtained from or disclosed to affiliates or third
parties—for example, in payroll outsourcing?
4. What is the impact of U.S. privacy laws and regulations, and/or
international privacy requirements, on the organization (which may require
a legal interpretation)?
5. How does the organization’s business plan address the privacy of personal
information?

Enabling Decision Support and Analytics

Data Analytics
• Data analytics refers to qualitative and
quantitative techniques and processes
used to enhance productivity and
business gain.

Business Intelligence
• Business intelligence (BI) is a technology-
driven process for analyzing data and
presenting actionable information to help
executives, managers and other corporate
end users make informed business
decisions.

Managing Systems Implementations

Proper Plan Execution
• Defining the integration points to the governance
processes
• Defining and managing planning data
• Defining and publicizing the planning calendar
• Clearly defining roles and responsibilities
• Communicating data and messages well

Preventing vs. Responding to Computer Fraud

Computer Fraud
• Computer fraud is the act of using a
computer to take or alter electronic data,
or to gain unlawful use of a computer or
system.

Top 10 Email / Internet Scams
• Phishing emails and Phony web pages
• The Nigerian scam, also known as 419
• Lottery scams
• Advanced fees paid for a guaranteed loan or credit
card
• Items for sale overpayment scam
• Employment search overpayment scam
• Disaster relief scams
• Travel scams
• “Make Money Fast” chain emails
• "Turn Your Computer Into a Money-Making Machine!"

Prevent / Respond
• Consider fraud risks associated with information
technology
• Design policies and internal controls to mitigate
risks
• Design and implement monitoring controls
• Establish policies to detect management
override abuse
• Establish policies which respond to a fraud
perpetration

ROI
• Return On Investment – ROI
• A performance measure used to evaluate the
efficiency of an investment or to compare the
efficiency of a number of different investments
• ROI measures the amount of return on an
investment relative to the investment’s cost
• To calculate ROI, the benefit (or return) of an
investment is divided by the cost of the investment,
and the result is expressed as a percentage or a
ratio.

Leveraging Emerging Technology

Moore’s Law
• Moore's law is the observation that the
number of transistors in a
dense integrated circuit doubles
approximately every two years.

Moore’s Law
By Wgsimon - Own work, CC BY-SA 3.0

Managing Vendors and Service Providers

Vendor Management
• Share Information and Priorities
• Balance Commitment and Competition
• Allow Key Vendors to Help You Strategize
• Build Partnerships for the Long Term
• Seek to Understand Your Vendor's Business Too
• Negotiate to a Win-Win Agreement
• Come Together on Value

Contact
David MacDonald
Principal – New Business Development
CPE Code: TCW

Risk Management to and
Through Retirement:
Healthcare
Charris Nelson
November 9, 2017

142
Healthcare Costs
• 10,000+ people in the U.S. will reach 65 each day from
2011-2030
• Result: Ballooning healthcare costs
• Average total health care costs for a 65-year-old healthy
couple retiring in 2015 = $394,954
Healthcare coverage is an important aspect of retirement
income planning. The focus of healthcare coverage is
minimizing risk while protecting assets.

143
Medicare
• Federal health insurance program for:
 People 65 or older
 People under 65 with certain disabilities
 Individuals with permanent kidney disease
or Lou Gehrig's disease
Provides basic healthcare coverage

144
Four Fundamental Questions
• When to enroll in Medicare?
 65 or later?
• In what to enroll?
 Public (Original) vs. Private (Part C) Medicare?
• What are the costs (and how to pay for them)?
• What isn’t covered?
 Lots, most importantly, long-term care

145
Known Costs
• Medicare:
 Part A: Hospital Insurance
 Part B: Medical Insurance
• Medigap Plans
• Medicare Advantage Plans (Part C)

146
Original Medicare
Fee-for-service health plan that includes:
Part A
(Hospital Insurance)
Part B
(Medical Insurance)

147
Part A Coverage
• Inpatient hospital care
• Skilled nursing facility (SNF) care
• Hospice care
• Some home healthcare

148
Part A Premiums
• Individuals get premium-free coverage if:
 Age 65 and
‒ Already receive retirement benefits;
‒ Eligible for retirement benefits; or
‒ Medicare-covered government employment
 Under age 65 and
‒ Received disability benefits for 24 months; or
‒ End-stage renal disease (ESRD)
‒ Lou Gehrig's disease
 2017 premiums up to $413/month
‒ Based on number of credits earned
Source: 2017 Medicare Costs: Centers for Medicare and Medicaid Services, December 2016

149
Part A Deductibles and
Co-Payments
Benefit Period • Begins: Day 1
• Ends: After 60 days w/o care
Inpatient Hospital Care Coverage
(2017)
• Up to 90 days in each benefit period
• Deductible of $1,316 (first 60 days)
• Co-payment of $329/day (maximum additional
30 days)
• “Non-renewable lifetime limit” co-payment of
$658/day (60 additional days)
Post Hospital Skilled Nursing
Facility Coverage (2017)
• Up to 100 days in each benefit period
• Patient pays nothing first 20 days
• Co-payment of $164.50/day (maximum is
additional 80 days)

150
Part B Coverage
Voluntary Coverage that includes:
 Doctor’s services
 Outpatient care
 Certain home health services
 Some preventative care

151
2017 Part B Premiums
Modified Adjusted Gross Income (MAGI) Monthly
Premium
Individuals with a MAGI of $85,000 or less;
Married couples with a MGI of $170,000 or less
$134.00
Individuals with a MAGI more than $85,000 up to $107,000;
Married couples with a MAGI more than $170,000 up to $214,000
$187.50
$267.90
$348.30
Individuals with a MAGI more than $214,000;
Married couples with a MAGI more than $428,000
$428.60

152
Part B Deductibles & Co-Payments
Medicare-Approved
Charges
Doctor or supplier claims 80% of
Medicare-approved charges
Patient pays:
• Annual deductible ($183 for 2017)
• Co-insurance (20% of the Medicare
Approved charges)
• Any additional charges not covered
by Medicare

153
Part A & B Enrollment
• Automatic Enrollment vs. Elective Enrollment
 Automatic enrollment if you are drawing Social Security
• Three Enrollment Periods:
 Initial Enrollment Period
 Special Enrollment Period
 General Enrollment Period
• Note: Look out for the Part B Late Enrollment Period

154
Elective Enrollment Considerations
• Passing on Medicare at age 65 because of current
employer group coverage
Which coverage is primary?
Beneficiary Entitled to
Medicare
Pays first Pays second
65 or older
and covered
by a current*
employer
group health
plan
Employer has
20 or more
employees
Group health
plan
Medicare
Employer has
fewer than 20
employees**
Medicare Group health
plan

155
A or B Enrollment with Group
Coverage?
• Part B may not be needed until group coverage ends
 No late enrollment if group coverage is primary
• Part A may be premium-free but
 Cannot make contributions to HSA if enrolled
 Cannot opt out of Part A after filing Social Security

156
Medicare Part D
• Helps cover the costs of prescription drugs
• Run by Medicare-approved private insurance companies
• Must have Part A and/or B
• Each plan can vary in cost/drugs covered
Note: Look out for the Part B Late Enrollment Period

157
2017 Part D Premiums
Modified Adjusted Gross Income (MAGI) Monthly
Premium
Individuals with a MAGI of $85,000 or less;
Married couples with a MGI of $170,000 or less
Plan premium
$13.30 + plan
premium
$34.20 + plan
premium
$55.20 + plan
premium
Individuals with a MAGI more than $214,000;
Married couples with a MAGI more than $428,000
$76.20 + plan
premium

158
Medicare Part D
1. Deductible
• You pay all drug
costs until you
meet your plan’s
deductible (if it
has one)
2. Initial Coverage
• You pay fixed
copays or
coinsurance until
you reach the
$3,700 total drug
cost limit
3. Coverage Gap
“Donut Hole”
• You pay 51% for
generics, 40 %
for brand names
until you reach
the $4,950 out-
of-pocket limit
4. Catastrophic
Coverage
• You pay the 5%
of costs for the
remainder of
the year
Standard Benefit Plan (2017)

159
Medicare Advantage Plans (Part C)
• Alternative to Original Medicare
 Offered by private insurance companies
 All plans must include Part A and Part B, and in many cases,
include Part D
• Coverage
 Prescription drug costs covered by selected plan
 Additional benefits covered by selected by plan
• Costs and rules vary by provider
 Copay, coinsurance structure

160
Medigap Plans
• Private health insurance policies
 Covers “gaps” in Original Medicare
• Must be enrolled in Part A and B
• Ten standardized plans
 Plan letters A-N
 2016 monthly premium range for Plan F= $159-$236
• 6-month open enrollment
Source: American Association for Medicare Supplement Insurance. HealthMarkets, Medicare Supplement Plan F:
Are More Benefits What you Need?, October 20, 2016

162
The “Unknown Costs”
• Long-term care
 Gap in Medicare coverage
 Financial risk
 Could negatively impact retirement income and estate plans

Risk Management To and
Through Retirement:
Insurance
Deborah Marino
November 9, 2017

164
A Financial Tragedy:
• What would happen if:
 Who is going to care for
your loved one?
 Do you have a plan?

165
What Happens Next:
• Your loved one needs full time specialized care….
 Self fund
 Government programs
 Family members
 Or….
* Fidelity Investments 12/21/2016 and * 4 Met Life Study 2013
Average
U.S.
401(k)
balance
$92,500
Cost for
average stay in
nursing home
(1year)
$90,000

166
Transferring the risk:
• You can transfer the risk :
 Traditional Long-Term Care Insurance
‒ Gives choices of care
‒ Eases the burden of family members
‒ Could be unaffordable for some
‒ You must qualify for it
‒ Chance that premiums could increase
Covered Care Includes:
Home Care
Adult Day Care
Nursing Home Care
Assisted Living Care
Home Health Care
Respite Care
Bed Reservation
And more……

167
Linked Benefits: HYBRID
• Another solution could be:
 Linked Benefit Solutions
‒ Life Insurance with Long-Term Care Benefits
‒ Annuities with Long-Term Benefits
‒ Accelerated benefit riders
‒ Pay for life, shortened pay or a single-pay premium period

168
Hybrid Example
 Single Premium Annuity Hybrid
50,000
100,000
100,000
350,000
100,000
200,000
200,000

169
Hybrid Example
50,000
100,000
150,000 300,000 450,000

170
Which Annuity Would You Prefer?
The one that came before the PPA
or the one that came after?
Taxable Growth
$50,000
Before the Pension
Protection Act*
$150,000
Cost Basis
$100,000
For Use
After-Tax $136,000
Traditional Annuity
Taxable Growth
$50,000
After the Pension
Protection Act*
$150,000
Cost Basis
$100,000
Traditional Annuity
TRANSFER
Existing annuity into
PPA-compliant
annuity
Taxable
Growth
$50,000
Tax Free
Growth**
$50,000
Cost Basis
$100,000
Additional
Coverage
$300,000
Total Coverage
$450,000
Multiplier
3X Premier
Coverage
When used for
qualified long-
term care
benefits

171
Policy Audit and Review
• Policy Audit and Review: A Great Service
 People do not know what kind of policies they have
 People do not know when their life insurance is going to expire
 Some people do not know who their beneficiaries are!
Age 40 60 70 80 9050 100

172
Final Note:
Before and after policy review…..
AFTER AUDIT- New PolicyBEFORE AUDIT – Existing Policy
Mrs. Client. Age 69 Desire is to pass on a small legacy to three grandchildren
with her $250K Universal life policy. We reviewed her policy and was able to
better her situation considerably so she can pass on her legacy.
Life Insurance: $256,000
Cash Value: $117,000
Premium: $0
Policy Terminates: AGE 87
Life Insurance: $326,000
Premium: $0
Policy Terminates: AGE 120
END RESULT: She increased her coverage by 70,000, the
policy lasts a lifetime instead of age 83 , AND her new
policy has the NEW Accelerated Death Benefit Rider. All it
cost her was her time to take the application and have an
insurance exam. A far better situation than her previous
policy.

173
Contact
Deborah Marino
Insurance Specialist
(440) 449-6800
dmarino@skodaminotti.com
Charris Nelson
Medicare Specialist
(440) 449-6800
cnelson@skodaminotti.com
Robert Coode
Partner
(440) 449-6800
rcoode@skodaminotti.com
CPE Code:
RMR

State and Local Tax Update
Mary Jo Dolson, CPA
November 9, 2017

175
State and Local Tax Update
• Ohio Budget Changes
• Ohio’s Small Business Deduction/Business Income
Deduction
• Municipal Reform
• Recent Municipal Court Case
• Ohio Commercial Activity Tax
• InvestOhio
• Ohio Sales Tax Changes/Hot Audit Issues
• Sales Tax Economic Nexus

176
Ohio Budget Bill
• Ohio Budget Bill
 Passed June 30, 2017
 Biennium budget will be adopted by July 1, 2018
 Significant line item vetoes
 Some have recently enacted by congressional vote
 Numerous aspects of the Ohio taxes were touched
by the budget bill

177
Ohio Budget Bill
• Personal Income Tax
 Number of brackets reduced from nine to seven
‒ Originally sought a reduction from nine to five brackets
‒ Eliminated the bottom two income tax brackets
 $0 - $5,000
 $5,000 - $10,000
 Individuals with income of $10,500 or less will not have a tax
liability
‒ Will be indexed for inflation yearly
 Inflation indexing of tax brackets and exemptions
‒ Incorporates inflation adjustments into the brackets
and exemptions

178
Ohio Budget Bill
• Personal Income Tax
 Increase in college and disability savings plan deduction
‒ Increase from $2,000 to $4,000
‒ Effective tax years 2018 or after
 Retains Business Income Deduction
‒ No changes to this deduction
‒ Will discuss the deduction in more detail

179
Ohio Budget Bill
• Sales Tax
 Local Sales and Use Tax Increases
‒ Applies to counties and transit authorities
 Permits increases by locals in increments of .1% instead of .25%
‒ Effective beginning July 1, 2018
 Sales Tax Holiday
‒ Enacted sales tax holiday for August 2018
‒ Similar holiday to what has occurred the last two years; it was just
enacted now instead of waiting until next year
‒ Three days and it will exempt certain items costing
less than a certain dollar amount
 For school supplies
‒ Many states have a yearly sales tax holiday
 School supplies
 Hurricane preparedness

180
Ohio Budget Bill
• Sales Tax
 Exempts digital music purchased and played through digital
jukeboxes
‒ Effective October 1, 2017
 Use tax collection by certain out-of-state retailers
‒ Out-of-state sellers required to collect tax beginning January 1, 2018
 Have annual Ohio sales of at least $500,000
 Uses in state computer software to make Ohio sales,
or utilizes third party to provide content distribution
network
‒ Very hot topic both federally and the different states

181
Ohio Budget Bill
• Ohio Tax Amnesty
 Amnesty program will run from January 1, 2018 through February
15, 2018
‒ Taxes delinquent as of May 1, 2017
‒ Penalties abated
‒ Half of all interest due will be forgiven
‒ Currently under audit or assessment issued
not applicable

182
Ohio Budget Bill
• Temporary Employee Services
 Recently enacted tax law requires an exemption certificate to be
provided if a customer is claiming exemption from sales tax.
 Past state very loose in requiring an exemption certificate if the
transaction was claimed to be exempt.
 There are currently five exemptions:
‒ Transactions between affiliated entitles
‒ Transactions in place for more than one year
‒ Transactions for resale
‒ Acting as a contractor or subcontractor
‒ Medical professionals

183
Business Income Deduction
• Survived the potential repeal as part of the budget bill.
• Right now still available.
• First $250,000 of business income is excluded from Ohio
individual income tax.
• The remaining business income will be taxed at three
percent.
• No longer have to apportion income to determine eligible
income.
• No federal attribution rules apply.

184
• Cannot take advantage of it with the IT 1140 or the IT
4708.
• Need to file an IT 1040 to take advantage of BID; this can
be filed even if IT 1104 or IT 4708 was filed.
• The rate then on either the IT 1140 or IT 4708 will be
around five percent, but only taxed at three percent if an IT
1040 is filed.
• We often see where an IT 4708 is filed and non-residents
do not file an IT 1040 to take advantage of the SBD/BID.

185
• Recent audit notices.
• State began reviewing the SBD/BID deduction.
• Issued correction notices for years.
• Biggest issue was deducting guaranteed payments and/or
salaries as SBD/BID.
• SBD/BID can only be taken against salaries and/or
guaranteed payments if 20 percent or more owner of the of
the entity.
• Many taxpayers took the SBD/BID against salaries and/or
guaranteed payments when not permitted.

186
• State issued corrections to the assessments for the 2013
and 2014 years.
• State felt there was some confusion when law was
originally enacted concerning federal attribution.
• If through federal attribution owned 20 percent or more of
an entity state permitted the SBD/BID.
• Only on originally filed returns – if received correction
notice and this applied state would correct and could
secure a refund of tax dollars paid.
• Position only applied to 2013 and 2014 tax year.

187
• Big issue we have seen involves the compensation and
guaranteed payments if less than 20 percent owner.
 Considered to be non-business income.
 Not treated as part of the business income deduction.
• Income is not apportioned
 Calculated against all sources of business income.
 Calculation first goes against Ohio business income and then
remaining deduction against non-Ohio business income.

188
Municipal Reform
• There has been a lot of conversation over the last several
years concerning Ohio municipal reform.
• Finally movement on it in the right direction
• There was additional movement as part of the last budget
bill.
• Biggest change to business taxpayers.
• Department of Taxation has added a new category on its
alerts addressing changes related to filing municipal
returns through the Ohio Business Gateway.

189
Municipal Reform
• Business Taxpayer Changes
 Can now opt in to file one municipal return through the Ohio
Business Gateway.
 Automatically renews unless it is cancelled.
 Sole proprietors and single-member limited liability companies
would still file through the various municipalities.
 Returns filed in this manner will be audited by the Ohio Department
of Taxation.
 Department will issue all bills, assessments and refunds if return is
filed through the Ohio Business Gateway.
 Will prescribe the form that will be utilized.
 Department will handle appeals and other administrative matters.

190
Municipal Reform
 All individual income tax filings will continue to be filed through the
municipalities.
 Employer withholding will also continue to be filed through the
municipalities.
 Important Dates:
‒ By March 1, 2018: businesses wishing to opt in must register through
the Ohio Business Gateway. This is the date for calendar year
taxpayers.
‒ By April 15, 2018: make first quarterly payment through the Ohio
Business Gateway.
‒ File 2018 net profits tax return through the Ohio Business Gateway in
2019 (April 15, 2019 same due date).

191
Municipal Reform
• Municipal filing through the Ohio Business Gateway
 http://www.tax.ohio.gov/MunicipalTax.aspx
 If you opt in prior to January 1, 2018 you will not receive your city
account number until mid January 2018. The state will not be
issuing numbers until that point in time.
 Prior to this date, if you would like confirmation of your registration,
the state has provided a contact number to confirm registration.
 In addition to registering with the state, you must notify all
municipalities that you did business in during the previous year.
 This notification does not have to be done if you are a new
business.
 If not filing in the same manner in every municipality (consolidated
or separate), you must wait to opt-in until you can file in one
manner with all cities.

192
Municipal Reform
 Change to “Throwback Rule”
‒ Throwback rule is eliminated.
‒ Effective for tax years beginning in 2018.
‒ All individual income tax filings will continue to be filed through the
municipalities.
 Employer withholding will also continue to be filed through the
municipalities.

193
Recent Municipal Court Case
• Ohio Supreme Court Decision
 SERP is considered a pension.
 As a pension, the income is exempt from city income tax.

194
Ohio Commercial Activity Tax
• Commercial Activity Tax
 Budget Changes
‒ Historic Rehabilitation Credit (previously discussed)
 Has been around since July 1, 2007
 Good time to re-examine gross receipts, especially if in the service
business
 Make sure you are filing properly
‒ Combined vs. consolidated
 State will examine ownership to make sure filing properly
 Big issue – only one $1 million exclusion

195
Ohio Commercial Activity Tax
• Commercial Activity Tax Audits
 State is conducting audits
 Look at method of filing combined/consolidated
 Also will look for hidden receipts

196
InvestOhio
• InvestOhio
• Still alive and kicking
• Great opportunity to generate a credit for Ohio Individual
Income Tax
• What is it
 10 percent credit for the amount invested.
 Requires an equity investment in a small business entity operating
in Ohio.
 Two-year holding period for investment and assets purchased with
investment.

197
InvestOhio
• Current opportunity for InvestOhio credit will expire June 30,
2019.
• InvestOhio credit was part of the budge bill enacted in 2011.
• Enacted to help spur investment in small businesses
operating in Ohio.
• Credit is available against the owner’s Ohio individual income
tax return.

198
Hot Ohio Sales Tax Audit Issues
• Close to being back to a seven-year audit for use tax
 Will also incur interest and penalties.
• Amnesty back in 2013 use tax assessment can only go
back until January 1, 2009
 Audits now if not already registered for use tax will go back to
January 1, 2009 to current.
• Temporary Employee Services
 Contract more than one year also looking at the consistency of
work.
• Placement services
 Watch where employees will be working even if employer is not
located in Ohio.

199
Sales Tax Economic Nexus
• States have been passing various economic nexus laws that do not
require any physical connection with the state to require a taxpayer to
be required to collect a states sales tax. Many of these laws have been
enacted to challenge Quill.
• Examples of these economic nexus standards are:
 Independent contractor/agency nexus
 “Click-through nexus” and related compensated solicitation/referral arrangements
 Affiliate nexus
 “Cookies nexus” – similar to Ohio
 Specific notification and/or reporting requirements also exist in many states
 Legislation introduced establishing a physical presence standard for state taxation
and regulation

200
• New York enacted the first click-through nexus statute in 2008
• Click-through nexus:
 Seller is presumed to have nexus through an independent contractor or
representative if the seller enters into an agreement with a resident where
the resident:
‒ For a commission or other consideration
‒ Directly or indirectly refers potential customers to the seller
‒ Whether by link on an internet website or otherwise
‒ If the cumulative gross receipt from sales from residents with this type of an
agreement exceeding a certain sales amount. This amount could be as minor
as $10,000 up to maybe $500,000 like Ohio.

201
• Affiliated nexus is different from click through nexus and cookies
nexus.
• With affiliated nexus, a related entity operating in a state with nexus
will create nexus for the related entity even if the related entity does
not have nexus.

202
• Click through nexus states – AR, CA, CT, GA, IL, KS, LA, ME, MI, MN,
MO, NV, NJ, NY, NC, OH, PA, RI, TN, VT, WA.
• Current Affiliated Nexus states – AL, AR, CA, CO, FL, GA, IL, IA, KS,
LA, ME, MI, MO, NV, NY, OH, OK, PA, RI, SD, TX,UT, VA, WI, WV.

203
Federal Legislation
• Legislation introduced establishing a physical presence standard for
state taxation and regulation.
• State may tax or regulate a person’s activity in interstate commerce
only when the person is physically present in the state during the
period in which the tax or regulation is imposed.
• Physical presence is established if the business activity in the state
includes:
 Maintaining a commercial or legal domicile
 Owning, leasing or maintaining real property
 Leasing or owning tangible personal property

204
Federal Legislation
• Physical presence is established if the business activity in the state
includes:
 Having employees, agents or independent contractors in the state who
provide design, installation or repair services.
 Having employees, agents or independent contractors in the state who
engage in activities that substantially assist in establishing or maintaining a
market.
 Regularly employing in the state three or more employees for any
purpose.

205
Federal Legislation
• Physical presence does not include:
 Entering into an agreement with a person for consideration who refers
potential purchasers by website, internet or otherwise.
 Any physical presence for fewer than 15 days.
 Product placement, setup or other services offered in connection with
product delivery.
 Internet advertising services provided by in-state residents not directed
toward in-state customers.
 Furnishing information to customers or affiliates in a state.
 Business activity directly related to the purchase of goods within the state,
if the final decision to purchase is made outside the state.

206
Federal Legislation
• This federal legislation was introduced on June 12, 2017, so this is
only in the introductory stage.
• It may be a significant amount of time before any of this legislation
may pass, if it passes at all, and in what form.
• Similar legislation was introduced in 2016 and it did not progress
beyond introduction.

207
Recent Activity
• South Dakota – recently lost a South Dakota Supreme court decision
against Wayfair.
• Case taken up to fight the Quill decision and potentially to get either
congress or the U.S. Supreme Court to take action and change how
online retailing is viewed.
• The court ruled that Wayfair does not have to collect South Dakota
sales tax because it does not have a physical presence in the state.

208
Recent Activity
• Massachusetts court has ordered Amazon to turn over a list of its third-
party vendors since 2012.
 Not sure how Amazon will react; will they comply or not?
 If they comply, will other states follow suit?
• Washington is aggressively pursuing third-party vendors for
compliance with its sales tax laws and Business & Occupation Tax
filing.

209
State Income Tax Economic Nexus
• States are also becoming aggressive when it comes to state income
tax nexus.
• Have enacted economic nexus standards – have a certain amount of
property, payroll and/or sales in state must comply with the states
income tax laws.
• Similar to sales tax nexus; it can be established without a physical
presence in the state.
 This would be similar to Ohio’s bright line nexus requirement for the Ohio
Commercial Activity Tax.

210
Contact Information
Mary Jo Dolson, CPA
Partner
(813) 386-3881
(440) 449-6800
mdolson@skodaminotti.com
CPE Code: SLU

“Lucky 13”
Fraud Prevention
Considerations
Frank A. Suponcic, CPA, CFE, CFF
November 9, 2017

212
Practice Areas
• Accounting malpractice
defense
• Arbitration
• Bankruptcy, reorganization
and restructuring
• Business valuations
• Commercial disputes
• Domestic relations matters
• Economic crime and
criminal tax defense
• Economic damage
modeling/computations
• Fraud and forensic
investigations
• Labor relations
• Mediation
• Receivership services
• Security and internal
control review
• Fairness opinions
• Special Master

213
Agenda
• Scope of Fraud
• Attendee Fraud Prevention Measures
• Fraud Prevention Recommendations
1. Human Relations
2. Management
3. Employee
4. Accounting/Audit
• Questions

214
TRUST is not an
internal control.

215
Scope
• Cost of employee theft – $40B
• Fraud discovery – 18 months
• Median fraud loss – $150,000
• 1/3 of bankruptcies are the result of fraud
committed by employees
• 75% of employees steal once, while 50%
steal frequently
• Employers lose 5% due to fraud

216
Weaknesses Contribute to Fraud
• A lack of internal controls
• The perpetrator was able to override the internal controls
• Lack of management review
• Poor tone at the top

218
#1 - Background and Credit Checks
• Employers must perform adequate due diligence
• It all starts with the hiring gatekeeper
• Stop the problem before one starts!
• The higher the position the more in-depth
• “Most” embezzlers are first time offenders
• When to perform

219
Background and Credit Checks
Must Do’s
• Secure written authorization from prospective employee
• Advise the candidate – on the front end – that you perform
background and criminal checks, as well as credit reviews
• Save time in the hiring process

220
What Am I Looking For?
• Civil litigation
• Income tax related matters
• Criminal cases
• Valid certifications
• Driving, narcotics and signs of violence
• Bankruptcy
• Personal financial responsibility

221
• Interim background and credit checks can alert
management of a “red flag”
• Workplace violence exposure
• What do YOU know about your temporary employees and
on-site independent contractors?
• Don’t forget social media
• Cost/benefit consideration
• Many resumes contain lies or omissions about prior
employment, education or qualifications

222
Fake Employment Histories
www.careerexcuse.com
www.thereferencestore.com
www.fakeyourjob.com
Fake Diplomas
www.phonydiploma.com
www.freediplomaproof.com
www.boxfreeconcepts.com

223
#2 – Written Fraud Policy
• Issued by management
• Face-to-face meeting with employee (usually would be HR)
• Inquires of the employee if they have committed any
fraudulent acts the past year?
• Provides space for an employee to
communicate any observations on others’
misconduct
• Criminal/civil/termination/restitution
• Signed and dated by the employee
• An annual event (that reinforces the anti-fraud message)

224
Written Fraud Policy
Includes:
• Reinforcement of management’s anti-fraud tone
• Who the policy applies to
• Definition of fraud
• Discussion of fraud prevention measures
• Recordkeeping
• What will happen to those who perpetrate a fraudulent act
• Reporting
• Training
• The company’s response to a fraudulent act
• Examples of fraud

225
#3 - Whistle Blower
Incentive Program
• Getting employees to buy into an anti-fraud
program is important. Offering a financial incentive is a motivator.
• Similar to a fraud hotline, except that in order to pay an incentive,
the individual must be disclosed.
• Targets illegal activities, violations, corruption and fraudulent
misconduct.
• Amounts of incentive can vary and be determined by the amount
of information provided and money recovered.
• The whistle blower is protected from any retaliation.
• Some companies have written whistle blower protection policies.
• Key is identifying the independent “Compliance Officer”.

226
#4 - Fraud Hotline
Outside of an “open door” policy…
• It is one of the most effective fraud
prevention and detection tools.
• It has proven to be cost effective.
• Internal tips are the number-one source for fraud detection.
• Anonymous tips can be extremely valuable.
• Analysis has determined a direct correlation between having
a fraud hotline and lower fraud losses, as well as quicker
detection.
• It must provide anonymity and confidentiality and provide no
fear of retaliation.

227
Fraud Hotline – Misconduct
Reportable Misconduct Could Include:
• Fraudulent behavior and theft
• Regulatory negligence
• Violation of laws
• Falsifications of records
• Conflict of interest
• Ethical violations
• Violation of company policies/workplace safety
• Corruption
• Discrimination and harassment
• False financial statement representations

228
Fraud Hotline – Internal PR
• Employee notification – posters
• Internal marketing awareness
and campaigns
• Management must encourage
use and reward behavior
• Reporting misdeeds is highly
valued and those who report
them will be protected

229
Fraud Hotline
Reporting Mechanisms:
• Internet
• Email
• Telephone
• P.O. Box
• Fax

230
Why Don’t Employees Report?
• No corrective action would be taken
• Lack of confidentiality
• Fear of retaliation
• Not sure who to inform
• Nothing is in it for them
• Don’t want to “make waves”
• Lazy
• Don’t care. Do not want to “get involved”

231
Fraud Hotline
Internal – cheaper, less trusted
External – nominal cost, private
• CPA/Attorney
• Redflagreporting.com
• Safehotline.com
• Fraudhl.com
• Lighthouse-services.com
• Tipshotline.net

233
#5 - Proper Tone at the Top
• Ethical atmosphere created by company leadership
• What employees see, employees emulate
• Management must communicate to employees what is expected
of them
• Management must lead by example
• Allow for the communication of concerns
• The company must reward integrity
• Employees want to meet expectations
• Compensation and incentive plans can encourage fraudulent
conduct (meet financial targets such as income and sales)
• Pressure to reach goals

234
Leadership
The three most important ways
to lead people:
1). By Example
2). By Example
3). By Example

235
Proper Tone at the Top
• About 50% of employees will report misconduct.
• Fewer employees will report misconduct today than
15 years ago.
• Employees under age 30 are least likely to report.

236
Setting the Proper Tone
• Talk about the importance of ethics
• Inform employees
• Keep promises
• Model ethical behavior
• Recognition and rewards
• Equal employment opportunities
• Team-oriented
• Compensation is professionally administered
• Don’t steal!

237
Examples of
Poor Executive Conduct
• Remove cash (i.e., skim)
• Expense personal credit cards
• Expense cars and phones for family members
• Expense vacations
• Pay personal expenditures with business funds
• Expense your child’s tuition
• Expense your entertainment and family dinners
Employees emulate executive conduct.

238
If You Talk the Talk,
Best You
Walk the Walk.

239
#6 – Regular Employee Education
• Fraud prevention and detection
• Should be mandatory for everyone
• Create a culture of “doing the right thing”
• Covers company’s stance
• Code of conduct or code of ethics
• Procedures and standards
• Roles and responsibilities on reporting
• Define and discuss various types of fraudulent acts
• Stresses the company’s values and expectations
• Reinforces the company’s fraud policy
• Ongoing

240
#7 – Employee Bonding:
Transfer the Risk
Call It What You Want
• Employee bonding
• Employee theft insurance
• Dishonesty policy
• Fiduciary policy
• Crime policy
Consider insuring your business against a financial
loss committed by your employees.

241
Employee Bonding
• Protects employers from financial loss caused by employee theft
• What valuables of yours (or your clients) can employees access
(and steal)?
• Cash, inventory, receivables, intellectual property
• Who do you insure?
• How much?
• Cost/benefit – ½ to 1% of the coverage
• Inquirer of your insurance agent/broker
• Don’t forget to make sure the legal and forensic costs are
covered in the policy!

242
#8 – Management Involvement
We have avoided a direct discussion (thus far) with
regard to having adequate internal controls.
There must be management oversight.
Management cannot be hands-off.

244
#9 – Mandatory
Vacation/Job Rotation
• At least a five-day annual vacation should be mandatory – no
matter the company size.
• Job rotation may be difficult based on the company size and
employee skill sets.
• This could reduce fraud by as much as 50%.
• Cross-training employees is valuable due to unexpected
vacancies.
• While on vacation, accounting records – including the checkbook
and bank statements – cannot be locked up.
• Fraudsters do not like to take any time off for fear that their
scheme will be detected by an innocent phone call or inquiry.

246
#10 – Fraud Risk Assessment
Most business owners and executives believe that their
company is well protected from being a fraud victim. My
experience has taught me many have a false sense of
security. Be proactive and identify your vulnerabilities.
Objectives:
• Identifies the internal and external vulnerabilities and “at
risk” employees
• Potential fraud schemes specific to the organization
• Internal control weaknesses and suggestions for security
enhancement
• Red flags

247
Fraud Risk Assessment
Factors that influence fraud risk:
• Type of business and/or industry
• Effectiveness of existing internal controls
• Ethics of the company
No System of Internal Control
Can Totally Eliminate Fraud.

248
Do the Existing Internal Controls,
Policies and Procedures Adequately…
Prevent fraud
Detect fraud
Enable the company to respond to fraud in a timely manner
Monitor, Identify and Address!

249
• Most effective for smaller companies
• Review of income tax returns and financial statements
• Crash course on the company
• Tour
• General ledger analysis
• Interview of targeted employees and management
• Optional deliverable – oral summary of findings and
enhancements or written report
• Engagement costs can be tailored based on estimated
hours
“You Can Pay Me Now or Pay Me Later.”

250
With proper employee notification, a fraud risk assessment
reinforces management’s tone at the top and commitment to
preventing fraud.
• What activities are the most vulnerable?
• Which employees put the company at the most risk?
• Who has financial incentives, pressures and the opportunity?
• Can management override any controls?
• You must consider IT risk and vulnerabilities.
• You must think like a criminal to determine how a fraudster would
exploit the existing controls.

251
#11 – External “Internal” Auditors
Who looks over your
accounting department
shoulders?
Many smaller companies
cannot afford to have an
internal audit department.
Outsource the function to a
CPA firm that is independent!

252
Benefits of Outsourcing
Internal Audit Function
• Some companies are too small to have an their own internal
auditor
• Company better able to control internal audit costs
• Assist with corporate governance, risk and compliance initiatives
• May be better trained and have access to industry best audit
practices
• May possess applicable internal audit software not owned by the
company
• Unbiased assessment
• Independent

253
#12 – Surprise Fraud Audits
• Includes assessment of internal controls

254
Surprise Fraud Audits
• In no way similar to an annual financial statement audit.
• It is a consulting engagement with no formal report (unless one is
requested).
• Identify with management targeted accounts and certain types of
transactions.
• Focus on payment amounts.
• Deliverable – our workpaper and face-to-face meeting.
• Management sets the scope, time allotted and frequency of
surprises.
• Enables the client to control the overall engagement spend.
• Least used – one of the most effective.

255
Surprise Fraud Audits
• Expense reports
• Credit card expenditures
• Payments to company personnel
• Payments to cash
• Examination of check source documents and selected
invoices such as credit cards and expense reports
• Electronic payments (EFTs)
• Disbursements sorts and analysis
• Bank reconciliations
• Journal entries

256
#13 – Test the Internal Controls
• The fact that you believe that you have adequate internal
controls does not mean that they are effective or that
employees are actually following them.
• Oftentimes employees are not trained on all of the proper
internal controls (due to many reasons such as time).
• Request a disbursement without substantiation.
• Have someone’s pay increased without the proper detail.
• Submit an incomplete expense report with no receipts.
• Ask that an accounts receivable balance be written off.
Testing the system provides a “teaching moment.”

257
ACFE Report to the Nation – 2016
Other Anti-Fraud Controls:
• External audit of financial statements
• Code of conduct
• Independent audit committee

258
Contact
Frank A. Suponcic, CPA, CFE, CFF
Partner
(440) 449-6800
fsuponcic@skodaminotti.com
CPE Code: FPB

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