ledger - mazarsusa.com · • Need for a simplified rate approval process ... by The Economist...

ledger

april 2015WeiserMazars LLP is an independent member firm of Mazars Group.

April 2015 | 32 | WeiserMazars Ledger

CONTENTS FOOD & BEVERAGE

With consolidation on the rise and incentives for the food and beverage sector to reduce operating costs and increase cash flow, switching to solar power has become a way for companies to accomplish both while also becoming energy efficient and environmentally responsible.

The WeiserMazars Ledger conTains arTicLes and aLerTs pubLished froM Jan. 1 - Mar. 31, 2015.

by Vincent Paolucci

Manufacturers and distributors of food and

beverage products that occupy commercial

buildings, particularly those with large roof tops,

can benefit from the installation of solar panels.

A number of pioneers such as Campbell’s Soup,

Mars Snackfood, US Foods and Del Monte Foods,

have already installed panels on many of their

buildings.

Various federal and state tax credits are

available to companies who install solar panels

to generate energy, allowing these companies

to quickly recapture their investment, and

making converting to solar even more attractive.

The federal government allows taxpayers a

30% investment tax credit on the net system

cost, which can be used to offset regular and

alternative minimum tax. Any unused portion of

the credit can be carried forward to future years.

In addition, certain states allow a tax credit

against income tax and property taxes. Solar

panel installation costs can also be depreciated

over 5 years using an accelerated depreciation

method against the approximately 25 year

determined life of a solar panel.

Other various rebates and incentives are

available to businesses based upon the

production levels of solar power. Many

businesses actually receive payments from their

local utility provider due to “net metering” – the

process of putting energy back into the power

grid when the solar panels produce more than

the building uses. Rebates and incentives vary

state to state but these can be predetermined by

the installer prior to any outlay of expenses.

While commercial solar power is not for

everyone, it is worth considering and often

provides a strong return on a minimal

investment. If you believe solar energy is an

option for your business, please contact us for

more information and to discuss the applicable

tax credits available in your area.

VincenT is a parTner in our Long isLand pracTice. he can be reached aT 516.282.7265 or aT [email protected].

3 | Solar Power – A Good Investment for Manufacturers and Distributors

4 | Technology Presents Possible Solutions to Major Water Industry

Challenges

6 | 2014 Media Barometer - 3rd Edition Survey

6 | The Road From Principles to Practice: Today’s Challenges for Business

in Respecting Human Rights Survey

7 | Sales Tax Nexus and the Internet – A New Landscape

8 | The True Face of Innovation

10 | Successfully Navigating the Stages of Technology Company

Funding

14 | Changing Asian Shipping Patterns and Current Supply Chain

Disruptions

16 | Israeli Debt-Based Financing for Real Estate

18 | New York State Sales and Use Tax Classifications of Capital

Improvements and Repairs to Real Property

20 | The Trusted Advisor: Going beyond expectations.

For Good.

21 | Top 10 Changes to the Federal Financial Institutions Examination

Council (FFIEC) 2014 Bank Secrecy Act/Anti-Money Laundering (BSA/

AML) Examination Manual

24 | What Does the Strengthening Dollar Mean to the Worldwide

Economy?

26 | Ensuring Sustainability: Top 6 areas of focus for Not-for-Profit

Organizations

28 | How to Avoid a Last Minute or Late Form 5500 Filing

30 | Five Hidden Items Critical to the Success of a New Business

32 | Weak IT Security Programs May Spell Disaster for Healthcare

Organizations’ Bottom Lines

34 | Measuring Internal Audit Performance

40 | Continuous Auditing - A Delicate Chemistry

45 | Trends and Issues for the 2015 Busy Season

50 | WeiserMazars Tax Alerts

54 | WeiserMazars Not-For-Profit Alerts

APRIL 2015 - ISSUE 8

Solar Power – a Good InveStment for manufacturerS and dIStrIbutorS


technology Presents Possible Solutions to major water Industry challengesBy Robert K. Wilson

This article was originally published in the

February 2015 issue of Water Technology

magazine.

Respondents to the WeiserMazars LLP 2014 US Water Industry Outlook, who came from both private and public companies, identified three key challenges for the US water industry. • Aginginfrastructure • Agingandpooravailabilityofmanagerialandplantworkers • Needforasimplifiedrateapprovalprocess

We found that the water industry is doubly challenged by aging

infrastructure and aging managerial and plant workers/lack of

available workers. This general lack of critical resources is making

it very difficult for the industry to increase operational performance,

reduce cost, and improve customer service.

Of these three primary challenges, the value of Smart Water

Metering (SWM) and Automated Meter Reading (AMR) in addressing

aging infrastructure and an aging, shrinking workforce has

become increasingly clear as both private and public water utilities

throughout the country continue to deploy these technologies.

Some of the key benefits gained from SWM and AMR are:

§ Enhancement in leak detection and repair prioritization.

§ Reduction in water theft through enhanced detection

techniques.

§ Enhanced workforce management, leading to a reallocation of

staff from manual meter reading to more impactful areas of

the operations.

§ Improvements in customer service and satisfaction.

§ Ability to provide off-cycle meter reading to support the

movement of customers.

§ Streamlined billing process, including the elimination of

estimated billings and improvement in billing cycles from

Quarterly to Monthly.

§ Execute remote service disconnects if required and allowed by

local statute.

§ Better customer awareness and understanding of water usage

leading to increased conservation and reduction in bills.

§ Remotely checking meter status leads to better workforce

management.

As you can see, SWM and AMR provide benefits for both the water

system operator and the consumer.

Aging InfrastructureAs in previous years, aging infrastructure was of particular concern

to respondents, with 32% stating that $100-$300 million would be

needed to modernize and upgrade their facilities and infrastructure.

Infrastructure is critical because it has a large impact on the overall

performance of water treatment and distribution systems and it

will likely continue to be the number one challenge moving forward.

Also of concern is the amount of non-revenue water being pumped

within the system. Non-revenue water represents the difference

between the water produced and sent into the distribution system

and the amount of water actually billed to a customer.

WeiserMazars’ 2014 US Water Industry Outlook found that 67%

of respondents had non-revenue water in excess of 10% within

their system and 26% had greater than 20% non-revenue water.

It is clear from these numbers that a large percentage of water

operations are faced with the challenge of reducing the non-

revenue water component of their operations and they are further

pressured by regulators who are limiting cost recovery rates to a

defined amount of non-revenue water in many locations.

This high level of non-revenue water is another product of the

aging infrastructure of water systems and implementing SWM and

AMR can be an effective first step in addressing the problem.

SWM technologies provide operators with the ability to identify and

target both main and customer water leaks. By better identifying

system leaks, operations can target limited staff and resources on

the areas that will have the greatest impact on the system. This

proactive approach to leak management enhances both customer

service and system reliability, while reducing the potential for non-

revenue water. These changes will significantly improve overall

operational efficiency.

Aging WorkforceA major challenge for the water industry is the increasing

average age of managerial and plant workers, many of whom are

approaching retirement. At the same time, operators are finding

it difficult to replace these valuable employees with new blood.

In the 2014 Outlook, respondents identified improved workforce

management as a top priority in responding to this challenge.

Increased adoption of technologies such as SWM and AMR can

help this situation be allowing for better

workforce management within the field

service and customer service areas,

essentially giving an organization the

ability to do more with less. They also

create technology job opportunities, which may attract individuals

who had never considered a career in the water industry.

Broadening the industry talent pool will be a step in the right

direction in terms of filling the talent void that will be created

in the next 10 years as existing workers retire and will position

the industry more competitively in searching for new talent with

technology skills.

The implementation of smart water meters and advanced meter

reading technologies can help address two of the key challenges

“Swm technoloGIeS ProvIde oPeratorS wIth the abIlIty to IdentIfy and tarGet both maIn and cuStomer water leakS.”

ENERGY & UTILITIES


featured SurveyS

2014 Media Barometer - 3rd Editionby WeiserMazars LLP and Mazars Group Over the last ten years, the media industry has seen revolutionary changes, particularly in the areas of consumer behavior, the rise of global internet connectivity, developments in mobile telephone and tablet usage and a marked increase in user-produced content. Media companies seized the opportunities presented by this new wave of digitalization, rethinking their business strategies to ensure steady growth. The third edition of our annual media barometer discusses changes in this fast-moving industry, analyzing performance in three key areas: revenue, profitability and cash. Scan the barcode to view entire survey!

The Road From Principles to Practice:Today’s Challenges for Business in Respecting Human Rights by The Economist Intelligence Unit, and sponsored by WeiserMazars LLP and Mazars Group The study explores the views of businesses worldwide on their responsibility to respect human rights and the ways in which this obligation is carried out. It draws on two main sources for its research and findings: a global online survey of 853 senior corporate executives and 9 in-depth interviews with independent experts (specialists from Harvard, Human Rights Watch, and the Institute of Human Rights) and senior executives of major companies (Coca-Cola, UBS, and Anglo American). Scan the barcode to view entire survey!

facing the water industry today. Simultaneously, development of

creative business solutions that will allow more water utilities to

take advantage of these technologies will bring improvements that

will drive sustainability of our water infrastructure well into the

future.

While industry and regulatory groups are pushing for the

installation of advanced metering nationwide, it will not be easy to

get these technologies in place without concerted effort because

of the fragmentation of the water industry. If the industry is to

effectively address its challenges, it must begin implementing SWM

and AMR as soon as possible.

roberT is a parTner in our neW York pracTice. he can be reached aT 732.205.2016 or aT [email protected].

CONSUMER PRODUCTS

SaleS Tax NexuS aNd The INTerNeT – a New laNdScape

by Robert A. Goldstein and Matthew Dopkin

It is estimated that the U.S. now generates almost

$400,000 of e-commerce every thirty seconds. On-line

sales made through Amazon, Overstock, eBay, and the

like create a challenge for many state taxing authorities;

how to impose an obligation to collect tax on out-of-

state sellers? Historically, states have been limited by

a physical presence nexus standard. If a retailer had an

in-state physical presence, then nexus was established

and sales tax had to be collected at the point of sale. This

physical presence requirement was satisfied by a store,

warehouse, other physical location or when a business

had employees conducting activities within a state. The

physical presence requirement was originally detailed by

the U.S. Supreme Court in the 1960s, and was revisited

by the Court again in the 1992 ruling Quill Corp. vs. North

Dakota (“Quill”). Quill held that out-of-state sellers do

not have the requisite nexus to collect sales taxes on

their transactions in states where they lack a physical

presence.

Fast forward to our present environment where

states seem to be side-stepping the physical presence

requirement of Quill in an effort to address budget

shortfalls. New York and Illinois led the charge against

internet retailers by imposing a sales tax collection

responsibility on out-state-sellers lacking a direct in-state

physical presence. This was done by applying concepts of

agency law to create a new nexus concept called “click-

through nexus.” Approximately 25 other states now either

have, or are considering, statutes similar to New York’s.

New York and Illinois specifically targeted Amazon’s

business model whereby unrelated associate entities

received commissions in the form of a percentage of

Amazon’s on-line sales related to the click-through

referral from the associate’s website. Under the New York

and Illinois “Amazon Laws,” the associate is considered to

be an agent of Amazon. As such, the associate’s in-state

presence is imposed upon Amazon, and the out-of-state

seller is treated as having the in-state physical presence

of their associate. Accordingly, out-of-state sellers were

required to register with New York and Illinois for sales tax

purposes and to collect state and local sales taxes on all

in-state sales despite lacking a direct physical presence

within these states.

The Amazon Laws were challenged in both New York

and Illinois, resulting in the Illinois statute being struck

down by the state’s Supreme Court, although the New

York statute survived several appeals. The distinguishing

element between the New York and Illinois statutes was

the fact that New York’s statute created a rebuttable

presumption of nexus, while the Illinois statute did not.

Amazon appealed New York’s holding to the U.S Supreme

Court, but cert was denied. The prior reluctance of the

U.S. Supreme Court to address the physical presence

matter may change, however, based upon recent

comments by Justice Anthony Kennedy. In a just-issued

concurring opinion to an otherwise technical ruling,

Justice Kennedy invited a challenge to the Quill decision.

The Justice said he believes the Quill decision is outdated

based upon the huge increase in remote sales, and

the resulting impact on the states, since that case was

decided. Furthermore, the Senate has just re-introduced

a bipartisan bill aimed at making it easier for states to

Five years after the Great Recession blasted large holes in government budgets, many states are still struggling to balance their books. 16 states are expected to have significant budget deficits over the next two years in the face of the rising costs of education, Medicaid, health care, and pensions and retirement benefits. Unlike the federal government, states generally can’t run at a deficit. 49 states have constitutional or statutory provisions requiring a balanced budget. These deficit challenges have resulted in states scrambling to find new sources of revenue - with the taxation of internet based sales perceived as a “pot of gold” by some states.


How can we go beyond buzz words, to create true innovation?

Following are specific examples of ways companies have truly

innovated, which can serve as inspiration for us all.

Expanding the Innovation Pool by Using the World’s Intellectual CapitalAccording to the United States Census Bureau, the world population

exceeded seven billion people in March 2012. With so many

people in the world, why do we often look internally for innovative

ideas? Mass collaboration between individuals located within and

outside of an organization, often referred to

as crowdsourcing, can be extremely effective

if used properly. General Electric (“GE”) has

shown that using this crowdsourcing technique

can lead to a significant increase in its ability

to innovate. GE recognizes that it cannot

always create the best ideas. By collaborating

with experts in various fields worldwide, the

company can help solve some of the world’s

most important problems. For example, in June

2013 GE created the 3D Printing Quest, a world-

wide public challenge to design a light-weight

bracket and hangers for jet engines via 3D

printing. The best designs were manufactured

by GE and the creators received prize money. Instead of tasking its

own engineers with this request, GE tasked the public and in doing

so received designs from individuals from over fifty-six different

countries. This expanded the overall intellectual capital available

for this project and helped the company achieve the best possible

outcome.

Implementing Successful Ideas from Unrelated IndustriesInnovations can be as simple as process changes that are made

to help a company become more efficient. Jim McNerney, CEO

of Boeing, looked to technology giant Apple to help innovate

Boeing’s process for developing new aircraft. In the past, Boeing

has looked to develop the most technologically advanced aircraft,

and in doing so has created completely new products. During the

2014 annual investor meeting, McNerney said that he would like

Boeing’s product strategy to be similar to Apple’s, where products

are developed in incremental steps with new products being

similar to old products, plus added innovations. In following this

process, Boeing will be undertaking less risk of cost overruns on

new products, which occurred in the production of the Boeing 787

Dreamliner.

Fusing Historical Successes with Contemporary IdeasHistorically, the bazaar is a marketplace of shops where goods and

services are sold. It originated in the Middle East and remains a

popular concept in some areas of the world today; however many

industrialized cities have replaced the bazaar with shopping malls.

A group of organizations including Juno Property Group, PWP

Asset Based Value Strategy, Glimcher Capital Group, and Caesars

Entertainment, agreed that the bazaar, if appropriately modernized,

could be an extremely successful endeavor in the United States

and created the Grand Bazaar Shops in Las Vegas, Nevada. The

Grand Bazaar Shops adopt the concept of the ancient open air

marketplace, rather than the contemporary shopping mall in an

attempt to compete with the ever-growing online retail industry.

The goal is to create a more interesting and interactive shopping

experience than a consumer could replicate online or in a standard

shopping mall. It combines bartering and negotiation, which are

rare in the twenty-first century American shopping experience,

with interactive customization, which is only possible with current

technology. The creation of the Grand Bazaar Shops illustrates

that there are many different places an organization can look for

innovative ideas as it looks to create a competitive advantage.

Innovation is a key word for any organization; however it can be

overused and at times is so broadly defined it can be perceived

as meaningless. We often create intra-organizational groups and

task them with the goal of formulating innovative ideas that will

take our organization to the top, but in doing so we are forgetting

the way that truly innovative ideas are created. We need to look

past ideas that are already implemented in our industry and look

for inspiration elsewhere, using all available resources including

people throughout the world, unrelated organizations and history to

help innovate and maximize competitiveness. The journey to create

true innovation must begin now!

Jason is an audiT Manager in our neW York pracTice. he can be reached aT 646.435.1573 or aT [email protected].

MANUFACTURING & DISTRIBUTION

The True Face oF INNovaTIoN

Oftentimes, we feel that the best way for our organization to improve is to replicate the successes of other organizations within our industry. While following these best practices may lead to some success, it can also severely limit our ability to achieve a competitive advantage as industry leaders have already implemented these ideas.

by Jason Slivka

collect sales taxes on online purchases – the Marketplace Fairness

Act passed the Senate in 2013 but was stalled in the House. If

enacted, the Marketplace Fairness Act of 2015 would give states

the option to require out-of-state businesses, such as those selling

online or through catalogs, to collect sales and use taxes.

Retailers should monitor and review their business plans,

state statutes, a possible Supreme Court challenge to Quill and

potential Marketplace Fairness Act legislation to ensure they are in

compliance with sales tax collection responsibilities as a result of

selling on the internet.

roberT is a parTner in our neW York pracTice. he can be reached aT 212.375.6579 or aT [email protected].

MaTTheW is a senior Manager in our pennsYLVania pracTice. he can be reached aT 267.532.4330 or aT [email protected].

“accordInG to the unIted StateS cenSuS bureau, the world PoPulatIon exceeded Seven bIllIon PeoPle In march 2012. wIth So many PeoPle In the world, why do we often look Internally for InnovatIve IdeaS? maSS collaboratIon between IndIvIdualS located

wIthIn and outSIde of an orGanIzatIon, often referred to aS crowdSourcInG, can be extremely

effectIve If uSed ProPerly. ”


At this stage of financing, companies need to focus

less on their products and focus more on revenue

and sales. The sophisticated investor understands the

market for your product or technology. Companies

need to demonstrate, in a quantifiable way, how they

can capture that market share.

Key metrics to focus on in the investor pitch are

Monthly Recurring Revenue (MRR) (or Annual

Recurring Revenue (ARR) if your business operates

with a year-long contract model), bookings and related

sales funnel, cash burn, churn projection and LifeTime

Value/Cost to Acquire ratio (LTV/CAC). A common

mistake for company management in preparing these

metrics is using disparate data points. Companies that

show bookings on an annual basis, churn on a monthly

basis and cash burn on a quarterly basis demonstrate

a lack of understanding on the key metrics and how

they relate to each other. It also makes it difficult for

investors to determine the exit value of a company,

and once a pitch deck becomes difficult for potential

investors to understand, they quickly lose interest.

Bookings and the related sales funnel should be one

TECHNOLOGY

SucceSSFully NavIgaTINg The STageS oF TechNology compaNy FuNdINg

by Nicole DiGiorgio

Startup companies may go through various stages of

external funding throughout their lifecycle. Typically,

the first stage consists of seed funding, which is usually

earmarked for developing the company’s product or

technology and achieving marketplace fit. Seed stage

companies usually raise $500,000 to $1,500,000 and

typically do not have institutional capital or venture

funding. Seed funding is generally easier to raise, due to

the smaller investment size and lower risk profile to the

investor.

Series A funding is significantly more difficult to raise

due to the larger round of financing required and higher

risk profile. Typically, investors in this round are focused

on the management team, progress made with the seed

capital, and revenue projections and financial metrics.

A typical Series A company has developed a repeatable

sales process and achieved product or technological

market fit. They generate revenue, but are not normally

profitable. Companies ready for Series A financing have

a strong understanding of their unit economics (users,

licenses, or whatever other non-financial data drives

their growth) and can develop and forecast revenue

projections. Typical Series A rounds generally range

from $1 million to $7 million, depending on how capital

intensive the company is. Series A rounds also normally

have higher valuations, which leads to increased

expectations during the investor pitch.

“compaNIeS Need To demoNSTraTe, IN a

quaNTIFIable way, how They caN capTure ThaT

markeT Share.”


uPcomInG webcaStS

featured vIdeo

Food & Beverage Forum Hosted by WeiserMazars LLP, the Food & Beverage Forums

are the premier CEO networking events in the New York metropolitan area for professionals in the food & beverage

industry. Scan the barcode below to view video!

We are pleased to announce the launch of our WeiserMazars Online

Insights webcasts! These informative sessions, led by our service line

and industry segment leaders, are designed to educate our connections

on the latest developments in the accounting industry and the technical resources needed in today’s business environment. Scan the barcode below

to view the 2015 schedule and register!

Reengineering a Company’s Distribution NetworkDate & Time: TBD

Led by: Jeffrey M. Cascini, WeiserMazars LLP

aPrIl 2015

“ltv/cac ratIo can be conSIdered the moSt ImPortant metrIc In a PItch becauSe It PutS the revenue and coSt to acquIre that revenue In context.”

TECHNOLOGY

of the first items presented as this is

the basis for all other metrics. Bookings

should start with a sales funnel that

takes a top down approach and clearly

demonstrates leads->qualified leads-

>opportunities->closed sales. Pitches that

only have sales targets but no quantifiable

process on how the company gets there

are not reliable and demonstrate a lack

of maturity. Actual marketing data and

assumptions applied to how this can work

at scale should be included. The company

should also have demonstrated that it

understands its sales cycle and simply

needs more capital to increase the inputs

at the top of the funnel.

Information on the recurring revenue

model should follow this, as sales are

the driver for the recurring revenue

model. Traditionally, software as a service

(“SaaS”) companies have used monthly

recurring revenue, or MRR, as the key

metric for measuring their business. More

recently, companies have begun using

annual recurring revenue, or ARR. This

reflects a move away from the traditional

monthly subscription model to an annual

subscription model. A general rule of

thumb is, if your company utilizes annual

contracts, be sure to present the revenue

in an annual recurring model format.

MRR is also typically used to predict cash

break even. In a business that focuses on

ARR and upfront billing, cash break even

comes at a much earlier point than in the

MRR model.

Another key element is gross and net

cash burn. Gross cash burn represents

total cash out of the company, while net

cash burn represents the net of cash in

and cash out of the company. This figure

is typically netted when presented to

investors, but showing it grossed up can

be favorable for a company that leverages

negative working capital. Negative

working capital in this sense relies on

customers paying annually or quarterly

upfront rather than in arrears.

Due to the fact that early SaaS companies

used the monthly model, the standard

metrics are always stated in terms of

monthly recurring revenues, monthly

cashflows, and monthly churn. Later

iterations of SaaS companies began

the shift towards the annual contract

model/annual billing/annual churn

which allowed companies to recoup their

investment in the cost to acquire and

cost of service during the contract period,

giving companies a chance to break even

or become profitable on a customer by

customer basis, before the customer had

the opportunity to churn.

Churn should be presented on the same

basis as sales and revenue, which is

monthly, annual, or sometimes quarterly.

A typical SaaS company with annual

contracts should expect to have a churn

of no more than 10%, and approximately

5% projected churn should be the

goal. Investors are extremely focused

on churn and will analyze your churn

number closely. Companies at this stage

should have enough data to make strong

assumptions of the churn at scale,

and use those assumptions to predict

the expected life of the customer. A

predicted churn of 8% translates into a

customer life of 12.5 years as opposed to

a predicted churn of 5%, which translates

into a customer life of 20 years. The

expected life of a customer is the driver in

the LTV calculation and small variances in

churn make a significant difference in the

ultimate value of the customer.

LTV/CAC ratio can be considered the

most important metric in a pitch because

it puts the revenue and cost to acquire

that revenue in context. For instance, if

your LTV/CAC ratio is 10/1, that means

that company revenue increases $10 for

every $1 spent on customer acquisition

costs. A LTV of $100,000 per customer

is essentially meaningless without an

understanding of the cost to acquire that

customer. The higher the CAC ratio, the

easier to reason that additional capital

will fuel growth at a favorable margin and

show venture capitalists that they will

receive a higher return on investment.

This is the item to spend the most amount

of time on during the investor pitch, as

a strong LTV/CAC ratio will definitely get

the attention of any potential investor. The

nuances of the LTV/CAC ratio merit their

own article, but all successful SaaS-based

businesses will have a strong LTV/CAC

ratio.

One of the biggest mistakes that

companies make is underestimating how

long fundraising takes and that raising

capital is a huge investment of time and

energy for the management team. Expect

this process to take at least 4-6 months

for a Series A round and plan to have

enough runway to get the actual wires

in the company’s bank account, not just

to a term sheet. Nothing is final until the

money is in the bank.

nicoLe is a Manager in our neW York pracTice. she can be reached aT 212.375.6817 or aT [email protected].


Most goods imported from Asia today flow through West Coast

ports, and then are moved eastwards, overland, by intermodal and

truck. The expanded canal, larger ships, Eastern port dredging

and other port improvements will reduce the overland flow,

allowing more goods from Asia to enter through Gulf and East

Coast ports. These changes will provide an economic boost to

these areas.

HOW MUCH WILL CONTAINER VOLUME GROW ALONG THE GULF AND EAST COAST? A recent Journal of Commerce article1 predicts that when the

new Panama locks open in early 2016, there will be double digit

percentage growth in container shipments via the canal the first

year, followed by an ongoing five percent year over year growth

thereafter. If these projected growth rates are realized, by 2020

additional containers handled by Gulf and East Coast ports as a

result of the Panama Canal expansion would grow by more than

1.3 million a year2. Other projections foresee even higher traffic.

There are two primary considerations to balance: transit times

and cost savings. The additional transit time to ship from Asia to

the East Coast through the Panama Canal, adds anywhere from

two to ten days in comparison to West Coast ports, depending

on the destination. However, there are also delays in the current

method of shipping. The ports of Los Angeles and Long Beach,

the largest West Coast ports, are at or near capacity and are

experiencing serious congestion and labor issues, adding cycle

time and inventory carrying costs, as well as negatively affecting

inventory availability and delivery downstream. Furthermore,

congestion in the high volume Chicago rail yards frequently

adds a day or two of delay for every container shipped through

the city. The cost difference to ship via the Panama Canal is the

major driver for change since each new large vessel can allocate

its operating costs across three times as many containers as

current ships, therefore significantly reducing the landed cost

per container. Rail and road costs to support the East will also be

lower.

PLANNING FOR THE PRESENT SUPPLY CHAIN DISRUPTIONThe landscape painted above sounds very promising. However,

until this becomes reality, the supply chain disruptions being

experienced today in Long Beach and L.A. will most likely continue

in some form. This congestion is being magnified by the backlog

of ships waiting to be unloaded and, even when purged, delays

occur. Presently, companies that have not planned for this type of

supply chain disruption are faced with increased cycle times, lack

of inventory and increased shipping costs. It is estimated that it

will take months to free up the pipeline. Downstream, customer

service is and will continue to be negatively affected with respect

to fill rate and delivery times.

The number of companies that have a top down, formal, effective

Supply Chain Risk Management Program is surprisingly low.

Companies that analyze their entire supply chain network and

develop contingency plans based on

itemized, potential disruption events are

better prepared for the present disruptions.

A flexible network that allows for quick

response to changing conditions would

be able to handle sudden changes like the current slowdown

through an established operational, cost and service plan.

Analysis and understanding of potential solutions such as prior

pipeline fill, out of network shipping, use of alternate ports,

expedited transportation modes, lead time compression, and

alternate supplier sourcing, as well as the resultant service and

cost implications, is critical in today’s ever-changing world-wide

business network.

Now is the time to plan for inevitable future supply chain

disruptions. Make no mistake, they will occur in some form and a

well-structured contingency plan is vital.

JeffreY is a Managing direcTor in our neW York pracTice. he can be reached aT 212.375.6637 or [email protected].

kerrY is an independenT suppLY chain consuLTanT. she can be reached aT 517.862.6820 or [email protected].

1 Journal of Commerce, “Drewry: Canal expansion will boost Panama transshipments by

double digits”, 19 January, 2015

2 Growth rates projected against 2012 West Coast port container volumes published by the

U.S. Maritime Administration, “US Port Calls 2012”

chaNgINg aSIaN ShIppINg paTTerNS aNd curreNT Supply chaIN dISrupTIoNS

Gradual changes in the costs of international shipping over the last decade are beginning to have a profound impactontheentireNorthAmericaneconomy.Thegoodnews is that the underlying cost of moving containerized goodsfromAsiatotheEasternhalfofNorthAmericawill drop over the next few years. In addition, congestion intheLongBeachandL.A.portswillbereduced.Theseeffects will become more apparent when the expanded PanamaCanallocksopeninearly2016.Althoughnotdirectly related, the present labor issues in California will hopefully be resolved soon, thereby improving delays currently being experienced at those ports.

By Jeffrey Cascini

and Kerry Frey“the number of comPanIeS that have a toP down, formal, effectIve SuPPly chaIn rISk manaGement ProGram IS SurPrISInGly low.”

TRANSPORTATION & LOGISTICS


REAL ESTATE

By Shahab Moreh

Prominent real estate owners and developers are sourcing a new form of capital—bonds issued and traded on the Tel Aviv Stock Exchange (TASE). It’s a creative concept, with benefits for both sides of the transaction. The funding technique is also attractive to technology companies, looking for capital to expand with a less-onerous due diligence process than U.S. securities funding often demands.

It’s a massive market—and growing. In 2013, nearly $9 Billion of real estate financing was completed. In 2014, more than $14 Billion was sold. Owners and developers crave affordable funding for their projects, and traditional U.S. credit sources, beset by problems from the real estate meltdown that peaked in 2008, are understandably cautious. That caution gets expressed through high rates,1 reams of paperwork, and arduous regulatory hurdles.2 In Israel, an abundance of liquidity and yield-starved investors seeking diversification into U.S. real estate, coupled with a favorable exchange rate between the shekel and dollar, have helped to push the Tel Aviv Bond 40 Index to a near-record high.

Funding costs for U.S. owners and developers frequently run

between 10%-11%.3,4 Compared to paying a fixed coupon of

less than 5% to garner credit through Israeli bonds. Bonds that

are locally rated A with 5 year terms are currently trading It’s a

massive market—and growing. In 2013, nearly $9 Billion of real

estate financing was completed. In 2014, more than $14 Billion

was sold. Owners and developers crave affordable funding for their

projects, and traditional U.S. credit sources, beset by problems from

the real estate meltdown that peaked in 2008, are understandably

cautious. That caution gets expressed through high rates,1

reams of paperwork, and arduous regulatory hurdles.2 In Israel,

an abundance of liquidity and yield-starved investors seeking

diversification into U.S. real estate, coupled with a favorable

exchange rate between the shekel and dollar, have helped to push

the Tel Aviv Bond 40 Index to a near-record high.

Funding costs for U.S. owners and developers frequently run

between 10%-11%.3,4 Compared to paying a fixed coupon of less

than 5% to garner credit through Israeli bonds. Bonds that are

locally rated A with 5 year terms are currently trading with a

fixed coupon of 4%-4.5%. Global supply and demand metrics have

pushed U.S. high quality bond yields to less than half that rate in

recent years. The bonds can be issued without collateral and with

limited covenants (i.e. debt to capital ratio, dividend policy and

coverage ratios). However, the company must maintain a rating

and certain financial criteria. If the bonds are issued with collateral,

rating may not be needed.

Typical funding size for Israeli bond deals is between $150 Million

to $500 Million, collateralized by commercial properties such as

shopping centers or commercial office buildings. A deal of that size

is considered small by U.S. underwriters, but is attractive to Israeli

investors, and thereby encourages medium-sized developers to

seek the benefits of debt-based financing on the TASE. A typical

structure will be for a 5 year term with semi-annual coupon

payments. The costs of these bond deals approximate 50 to 75

basis points per year.

These deals are not without risk, and borrowers must be prepared

for what can be an unfamiliar and complicated process. You

typically have privately owned operators and developers of real

estate companies contemplating this financing structure, and

they are not used to the regulatory and continuous reporting

responsibility. To begin with, the regulatory environment is different.

Rather than adhering to the U.S.’s Generally Accepted Accounting

Principles (GAAP standards), Israeli bond financing must comply

with International Financial Reporting Standards (IFRS), and

overcome a different set of compliance hurdles. For example, IFRS

requires reporting for several quarters and years on a comparative

basis.

Another issue is the way in which assets are reported on the

financial statements. Under GAAP, real estate is reported on the

balance sheet at its historical cost, with depreciation applied for

wear and tear. Conversely, under IFRS, real estate is reported

at fair value, reflecting a more accurate representation, and

construed to be more informative to investors in terms of its true

performance. It can often be higher than the historical cost method

used for GAAP.

These deals require a degree of specialization and contacts with

which U.S.-based companies may be unfamiliar. A successful

transaction requires an accounting firm with expertise in both

Israeli and U.S. taxation, as well as experience to complete the

audit in accordance with IFRS. In addition, appraisals are required,

and structuring the deal to minimize its tax impact makes it vital

to have tax advisors and local Israeli CPAs familiar with both

countries’ tax laws. It also demands an investment banker or

underwriter with experience marketing the transaction through

Israel’s TASE.

Before an owner, developer (or company) enters into an Israeli

debt-based funding transaction, he must understand the value of

the asset in relation to the market opportunity on TASE. He will

want to evaluate key performance indicators to determine whether

a deal makes sense. That’s where a valuation expert, in the form of

an MAI appraiser certified to render real estate values, can make an

important difference. An accounting firm may have these experts

in house, but independence rules preclude them from performing

both the audit and the valuation. In that case, a third-party

appraiser is needed.

We are seeing several companies contemplating Israeli debt-based

financing as an attractive alternative to obtaining capital, whether

for real estate development or to fund acquisitions. Technological

advancements in Israel have created an enormous appetite for

yield, diversification, and expanding their international reach. But it

demands specialized expertise to meet the burdens of the complex

regulatory and compliance environment. Any company entering

into such a transaction must be prepared for the additional scrutiny

that a public debt offering engenders. Working with a firm that has

boots on the ground in Israel should be step one.

shahab is a parTner in our neW York pracTice. he can be reached aT 212.375.6791 or [email protected].

1 http://www.recapitalnews.com/us-developers-vying-piece-israeli-bond-market/ (paragraph 15)

2 Ibid. (paragraph 12)

3 http://www.globes.co.il/en/article-2-us-real-estate-firms-to-raise-nis-400m-on-tase-1000983917

(paragraph 2)

4 http://www.rew-online.com/2014/08/27/lower-yields-draw-new-york-developers-to-israeli-bonds/

(paragraph 3)

ISraelI debT-baSed FINaNcINg For real eSTaTe


REAL ESTATE

§ It substantially adds to the value of the real property, or

appreciably prolongs the useful life of the real property.

§ It becomes part of the real property or is permanently affixed

to the real property so that removal would cause material

damage to the property or article itself.

§ It is intended to become a permanent installation.

If a contractor performs a capital improvement on real property

and if the property owner submits a properly completed Form ST-

124, Certificate of Capital Improvement to the contractor, no sales

tax is required to be collected from the customer. This executed

form is evidence that the work to be performed will result in a

capital improvement to real property.

However, when a contractor performs a job that is considered

a repair, maintenance or installation service to real property,

sales tax must be collected from the property owner unless the

contractor receives a properly completed Form ST-119.1, Exempt

Organization Certification.

In general, the addition of a mobile home to real property is never

a capital improvement, regardless of how it is installed. In addition,

there are special rules regarding the installation of a floor covering

which are further discussed in New York State Publication 862,

Sales and Use Tax Classifications of Capital Improvements and

Repairs to Real Property.

The definition of a capital improvement for New York State sales

and use tax purposes differs from the definition for federal income

tax purposes, which confuses many taxpayers. Taxpayers should

be aware of this and make sure to research the rules for each

jurisdiction.

The term real property in the definition of a capital improvement

mentioned above means real property, property or land as defined

in the Real Property Tax Law and includes but is not limited to:

§ Land and vegetation growing on the land such as trees, shrubs,

bushes, and grass;

§ Buildings and structures erected upon, under, or above land, or

affixed to the land;

§ Utility lines, wires, and poles;

§ Mains, pipes and tanks for conducting steam, heat, water, oil,

gas and electricity; and

§ Boilers, heating, ventilating, or lighting apparatus, and

plumbing.

In the case of a capital improvement, if you are a property owner

who:

§ Purchases materials and supplies only and you perform your

own labor, you pay tax to the supplier on the materials and

supplies.

§ Purchases materials and supplies and hires a contractor to

perform the labor, you pay tax to the supplier on the materials

and supplies, but you do not pay tax to the contractor for the

labor.

§ Purchases materials and supplies and labor from the

contractor, you pay no tax.

In the case of capital improvements, if you are a contractor who

purchases materials and supplies, you pay tax to the supplier and

you do not collect any sales tax from your customer.

In the case of a job that constitutes repair or maintenance, if you

are a property owner who:

§ Purchases materials and supplies only and performs your own

labor, you pay tax to the supplier on the materials and supplies.

§ Purchases materials and supplies and hires a contractor to

perform the labor, you pay tax to the supplier on the materials

and supplies and to the contractor for the labor.

§ Purchases materials and supplies and labor from a contractor,

you pay tax to the contractor on the total charge.

In the case of a job that constitutes repair or maintenance, if you

are a contractor who:

§ Purchases materials, you pay tax to the supplier, even though

you are also required to collect tax from your customer.

However, you are entitled to a refund or credit of the tax that

you paid on the materials that you transferred to the customer.

§ Purchases supplies, you pay tax to the supplier

For more information, refer to New York State Publication 862,

Sales and Use Tax Classifications of Capital Improvements and

Repairs to Real Property.

donaLd is a parTner in our Long isLand pracTice. he can be reached aT 516.620.8420 or [email protected].

Jennifer is a senior Managing in our Long isLand pracTice. she can be reached aT 516.620.8464 or [email protected].

“the defInItIon of a caPItal ImProvement for new york State SaleS and uSe tax PurPoSeS dIfferS from the defInItIon for federal Income tax PurPoSeS, whIch confuSeS many taxPayerS.”

new york State SaleS and uSe tax claSSIfIcatIonS of caPItal ImProvementS and rePaIrS to real ProPerty real eState

By Donald Bender

and Jennifer Safran

For contractors and property owners it may be difficult to distinguish whether services performed are a capital improvement to real property or if they constitute repairs, maintenance, or installation services to real property. Depending on how the service is classified, contractors must follow the rules set forth by New York State to collect and/or pay sales and use tax. For New York sales and use tax purposes, a capital improvement is any addition or alteration to real property that meets all three of the following conditions:


by Jules Reich

A trusted advisor is genuinely interested in and focused on their

clients’ needs, standing out from other hired experts. While

their knowledge must be broad enough to cover a wide range

of potential client requirements, they must also have access to

a deep bench of qualified backup talent to handle those areas

where the advisor can enhance his or her services with additional

expertise. Short-term considerations or solving a single issue

cannot be the drivers of the client/provider relationship. By making

the relationship all about the long run, the trusted advisor proves

his commitment to the client’s success and strengthens their

bond.

Finally, trusted advisors must be passionate and enthusiastic

about their work. That passion drives a commitment to ethics and

integrity, all essential components of a good relationship. These

qualities help guide the advisor to making the right decisions, both

for the client and for society at large. Trusted advisors want to be

relied upon for the quality of their expertise, their relationship to

clients and their credibility in the market. They act in a transparent

way with clients, ensuring that all business information is accurate

and anything of concern is communicated quickly and clearly. If

they show true commitment, the advisor can deliver services that

go beyond the engagement terms, meeting higher expectations

and fostering integrity in the marketplace.

How WeiserMazars Plays Our PartWeiserMazars was recently retained to perform a tax structuring

on a selling transaction. In order to better assess our client’s

needs and business activities, we started working with their

lawyers on tax issues. It rapidly became evident that the business

had major flaws. Although the buyer was ready to purchase the

business in that state, we believed that the time for the transaction

was not right and that both parties would not get the most out of

it. The business needed time to recover and be at a better stage

before it could be sold at a good price.

As a result, we presented different options to our client, including

advising them not to proceed with the deal because it was against

every stakeholder’s best interest to do so. Consequently, the client

stopped the deal and chose to try to turn his business around.

Although this mean that we lost the transaction engagement we

were originally hired to perform, the client subsequently retained

us to advise him on ways to finance the business moving forward.

As a trusted advisor, our commitment to the client was not merely

to provide tax structuring expertise, but to make sure that in the

long run all stakeholders of the deal would be better off.

JuLes is a parTner in our neW York pracTice. he can be reached aT 212.375.6523 or aT [email protected].

FINANCIAL ADVISORY SERVICES

A trusted advisor delivers benefits that make them sought out by decision-makers. They understand the challenges faced by their clients, from industry-specific features to unique day-to-day operational issues. He is a reliable, consistent and credible partner for his clients due to a collaborative approach on client challenges. collaborative approach on client challenges.

The TruSTed advISor: goINg beyoNd expecTaTIoNS. For good.

BANKING

by Steven G. Lewis

A number of changes were recently made to the Bank

Secrecy Act/Anti-Money Laundering Examination Manual.

Below, we present the “Top 10” revisions to the Manual

along with our analysis

1. Scoping and Planning – Clarified that the independent

testing of the BSA Program need not be performed by an

“auditor,” whether internal or external.

coMMenTarY: This clarification stresses substance over

form. The person (not necessarily an “auditor”) performing

the testing must be independent - that is not “involved”

in the bank’s BSA/AML compliance program and must

present his or her report to the Board of Directors or a

Board committee comprised of outside directors.

2. Customer Due Diligence – Added a footnote reference

to FIN-2010-G001, 2010 “Guidance on Obtaining and

Retaining Beneficial Ownership Information” issued in

May 2010. The Guidance consolidated existing regulatory

expectations for obtaining beneficial ownership

information for certain accounts and customer relationships.

coMMenTarY: The Guidance retained risk based CDD, which may include identifying and verifying beneficial

owners. The Guidance also retained private banking account beneficial ownership verification requirements.

Note that an ownership threshold was not specified. However, FinCEN’s Notice of Proposed Rulemaking (August

4, 2014), “Customer Due Diligence Requirements for Financial Institutions,” does specify a threshold of 25%. This

Notice is not included or otherwise referred to in the Manual, presumably since it is still in the proposal stage.

3. Suspicious Activity Reporting (SAR) – Established new guidance on controls over banks’ BSA monitoring

systems. Specifically, bank policies and procedures should clearly document the authority to “establish or

change expected activity profiles” used to detect unusual activity. In addition, controls should ensure limited

access to the monitoring systems and access privileges in the system must be appropriate under the

circumstances. Furthermore, any changes should require the review and approval of the BSA compliance

officer as well as senior management. The Manual also added a requirement that management tests the

“filtering criteria” in the monitoring system. Previously management only had to “review” the criteria, now it has

to “review and test.” Management, however, should still be able to “document and explain” the models in the

system. Finally, an “independent validation” of the system’s “programming methodology and effectiveness” to

TOP 10 CHANGES TO THE FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL (FFIEC) 2014 BANK SECRECY ACT/ANTI-MONEY LAUNDERING (BSA/AML) EXAMINATION MANUAL


ensure that the models are detecting potentially suspicious activity

has always been required. Now the scope of the independent

validation has been expanded to “verify” the surveillance

monitoring policies/procedures and management’s compliance

with such policies.

coMMenTarY: BSA systems’ filtering criteria, parameters, rules and

programming methodology are all considered part of the models

used to detect potentially suspicious activity. Therefore, the April

4, 2011, Supervisory Guidance on Model Risk Management (issued

by the Board of Governors of the Federal Reserve System and the

Office of the Comptroller of the Currency) with its requirement on

model documentation and validation also applies.

4. OFAC – The Manual added OFAC’s “encourage[ment]” for banks

to take a risk-based approach when implementing their OFAC

programs.

coMMenTarY: The most interesting part of the Manual as it relates

to OFAC is what it does not contain. While the Manual was

issued in November 2014, it does not include OFAC’s “Revised

Guidance on Entities Owned by Persons Whose Property and

Interests in Property Are Blocked” (August 13, 2014). This Revised

Guidance aggregates ownership interests of SDNs in an entity. If

the aggregate direct or indirect ownership of SDNs in an entity

reaches 50% or more, then the entity becomes blocked (known as

a “shadow” or “deemed” SDN). In other words, if blocked persons

own directly or indirectly 50% or more of an entity, then that entity

itself

becomes blocked. Thus, financial institutions are expected to

obtain beneficial ownership information on all entity accounts

and many banks already do so. However, that still leaves open the

question of what ownership thresholds to use when identifying

beneficial owners. FinCEN’s Notice of Proposed Rulemaking

dated August 4, 2014, “Customer Due Diligence Requirements for

Financial Institutions,” would seem to indicate that a 25% threshold

would be acceptable. However, OFAC’s Q+A #401 implies that a

10% threshold is appropriate, although the actual regulations have

yet to be issued. Also, the Internal Revenue Code (FATCA) generally

specifies a 10% threshold for foreign entities. Ultimately, which

threshold to adopt becomes a risk based decision although banks

should be prepared to justify their decision.

5. BSA/AML Compliance Program Structures – Added a caution on

restricted transparency across the organization and the need to

ensure AML controls are appropriate under the circumstances.

coMMenTarY: This seems consistent with FIN-2010-G001, 2010,

“Guidance on Obtaining and Retaining Beneficial Ownership

Information, which called for implementing CDD/EDD procedures

on an enterprise-wide basis and AML staff “crosschecking”

information with other departments.

6. Correspondent Accounts (Foreign) – Added a risk mitigation

measure that U.S. banks should determine whether their foreign

correspondents have acceptable AML programs, including

customer due diligence practices, suspicious activity identification

processes, and recordkeeping documentation. This also includes

understanding the effectiveness of the AML regime of the foreign

jurisdictions in which their foreign correspondent banking

customers operate.

coMMenTarY: Based on Appendix H, under Foreign Correspondent

Account Recordkeeping, Reporting and Due Diligence, this would

also seem to apply to a U.S. bank’s accounts with its foreign

branches.

7. Prepaid Access – This section underwent major changes. Of

particular interest, banks now need to review the prepaid access

third party service providers’ BSA compliance programs as well

as their BSA monitoring capabilities. Also, banks need to obtain

transaction activity from the providers and review transactions for

potentially suspicious activity.

coMMenTarY: In accordance with the Manual’s guidance on Nonbank

Financial Institutions, providers and sellers of prepaid access are

now considered MSBs, subject to specified thresholds/exclusions

such as the type of prepaid card (open vs. closed loop), amount

(maximum value per device per day), potential usage (domestic

vs. international) and method of reloading (depository vs. non-

depository source).

8. Third-Party Payment Processors – Added various risk

mitigation measures, most notably that banks should “audit” their

third party payment processing relationships. Such audits should

encompass checking that the processor is fulfilling its contractual

obligations and verifying the legitimacy of its merchant clients.

coMMenTarY: This reflects increased recognition that Third-Party

“The most interesting part of the manual as it relates to OFAC is what it does not contain.”

uPcomInG eventSPhilly I-day | april 9, 2015 | Philadelphia, Pa

Business leaders and executives from across the region will focus on social, economic and financial trends influencing the risk management and insurance industries at this annual conference presented by the Insurance

Society of Philadelphia and the Philadelphia CPCU Society Chapter.

acG InterGrowth | april 13-15, 2015 | orlando, fl We are a proud partner and Growth Supporter of ACG InterGrowth. For more than 40 years, InterGrowth has been the middle market’s primary source for networking and deal flow, bringing together M&A professionals from across the

globe and all industry segments to offer attendees three key benefits: capital, connections and deals.

the rooftops conference nyc 2015 | april 24, 2015 | new york, ny Our own Ron Ries will be speaking at The Rooftops Conference NYC 2015, the fifth annual symposium for the not-for-profit sector focused on the role of real estate — owned, leased, or hosted physical space — in the operations, financial performance, and achievement of mission by not-for-profit organizations of all sizes and mission types.

targetmarkets Spring 2015 | may 3, 2015 | atlanta, Georgia Our Financial Services Consulting Team will be located at Table 39 at TargetMarget’s (TMPAA)’s 2015

Mid-Year Meeting. The team will be sharing solutions to core issues facing the industry today such as expense management initiatives, infrastructure rationalization, control remediation and process optimization.

Payment Processors are generally considered high risk.

9. Currency Transactions Reporting Exemptions – Added

marijuana-related businesses to the list of businesses ineligible

for exempting from CTR filing requirements. Also, added a footnote

reference to FinCEN’s Guidance: “BSA Expectations Regarding

Marijuana-Related Businesses, FIN- 2014-001,” February 14, 2014.

coMMenTarY: As the number of marijuana businesses increases

– particularly in Colorado - the Federal Government has taken a

“laissez faire” approach to regulating them. Nevertheless, banks

need to be aware that, notwithstanding state law, it is a violation

of Federal law “to manufacture, distribute or dispense marijuana.”

Therefore transactions with marijuana related business will

require SAR filings – Limited, Priority and/or Termination filings,

depending on the bank’s consideration of the legality of the

customer’s activities, detection of potentially suspicious activity

and compliance with the Cole Memo (U.S. Department of Justice,

“Memorandum for All United States Attorneys: Guidance Regarding

Marijuana Enforcement,” August 29, 2013, authored by James M.

Cole, Deputy Attorney General).

10. Nonbank Financial Institutions – In addition to defining

providers and sellers of prepaid access as MSBs (see Prepaid

Access above), the Manual also considers administrators and

exchangers of virtual currency to be MSBs (specifically, a money

transmitter) and thus banks are expected to apply appropriate BSA

monitoring procedures similar to those for money transmitters.

coMMenTarY: Virtual currency (such as Bitcoin) administrators

are now considered MSBs and their accounts should be monitored

accordingly.

Please contact Steven Lewis for a copy of our complete “Overview

of Changes” document and visit www.ffiec.gov to access the

Manual.

sTeVen is a senior Manager in our neW York pracTice. he can be reached aT 646.656.1942 or [email protected].

BANKING


WHAT DOES THE STRENGTHENING DOLLAR MEAN TO THE WORLDWIDE ECONOMY?

For nearly ten years, the U.S. dollar took a back seat to the euro.

Record-high federal deficits, soaring commodity prices, and a

weak economy all extracted their toll. Three rounds of quantitative

easing (QE) to stem the effects of the global fiscal crisis resulted in

punitively low interest rates for savers.

In July 2014, economist David Malpass called for change, claiming

that a stronger dollar and lower oil (and other commodity prices)

would strengthen the U.S. economy and engender world peace.1

As though on cue, the dollar has risen 18% against the euro since

June 2014, and oil prices have fallen nearly 40% due to both lower

global demand and increased U.S. supply. U.S. interest rates, by

no means robust, are still higher than those in other countries,

thereby attracting capital inflow. GDP is also improving, and the

Federal Reserve is hinting at raising interest rates by summer. The

federal deficit is shrinking, and the shale oil revolution is reducing

the U.S. trade deficit.2

While the U.S. has terminated its quantitative easing program, the

Bank of Japan and the European Central Bank (ECB) are expanding

theirs. ECB Chairman Mario Draghi launched a massive bond

buying program of €1.1 Trillion ($1.3 Trillion)3 to spur Europe’s

stagnant economy and lure foreign investment.

Since the late 1970s, the U.S. stock market investor has seen

the stock market perform twice as well during dollar bull

markets than during dollar bear periods.4 But, while Americans

may be enjoying fatter portfolios and greater spending power,

multinational U.S. corporations who depend on exports to Europe

are dealing with the revenue fallout. Not only do they have to

handle lower levels of exports thanks to U.S. goods being more

expensive in Europe, their profits shrink even further when those

revenue dollars are repatriated, because income earned in euros

is worth less when converted to dollars. Just a few months ago,

American corporations anticipated double-digit earnings growth

for 2014.5 As the actual numbers are posted, expectations have

been tempered downwards, and energy, materials, utilities, and

consumer staples are slated to post negative growth rates for

Q42014.6 For example, McDonald’s predicted that the higher dollar

could cause a $.09 per share hit to fourth quarter earnings7 and

Procter & Gamble and Pfizer both predicted profit hits because

of negative currency impact - $1.8 Billion and $2.8 Billion,

respectively.8

By Louis Osmont and Jules Reich

FEW AMERICAN CONSUMERS LAMENT THE RETURN OF A STRONG dOLLAR. THEY SEE THE REWARdS IN THEIR GAS TANk ANd WHENEvER THEY BUY FOREIGN-PROdUCEd PROdUCTS. BUT THE REST OF THE WORLd, PARTICULARLY EUROPE, ARE NOT AS SANGUINE.

INTERNATIONAL SERVICES

But benefits also can accrue on both sides.

For one, European imports cost less for

U.S. consumers. Therefore, European

manufacturers, capitalizing on subsequent

increased demand in the U.S., will reap the

rewards of greater revenue and stronger

balance sheets. In addition, foreign

investors seeking higher returns than what

may be achievable in their own financial

markets are again investing in the U.S.,

where the yield on 10-year U.S. Treasury

bonds hovers slightly below 2% compared

to just .46% for 10-year German bonds.

This trend is expected to continue. In fact,

in 2013 (the latest numbers available),

seven of the top ten foreign investors in the

U.S. were European.9

A stronger dollar also has direct, positive

ramifications for U.S. mergers and

acquisitions (M&A) activity in Europe, as

long-term players who’ve had an eye

on making European investments can

now purchase them less expensively.

The private equity market, known for its

propensity to follow growth, rather than to

lead the charge into unproven economic

waters, is witnessing resurgence.

Conversely, Euro Zone companies seeking

U.S. investments may put those plans on

hold, as the eroding euro means it will cost

more to buy companies here.

Europe’s tourism industry should also

gain, as U.S. travelers bearing dollars

flock to foreign hotels and restaurants.

Similarly, Euro Zone companies with U.S.

manufacturing subsidiaries should see an

uptick to their bottom line.

Our European-based clients are optimistic

about the strengthening dollar. Their U.S.

subsidiaries purchase goods from the

European parent, who in turn, invoices the

U.S. companies in dollars, which then flow

to the company’s bottom line. The U.S.

subsidiaries realize higher profits via lower

costs, creating a win-win situation.

A word of caution: it takes more than

currency manipulation to strengthen an

economy, something to which Japan can

attest. Countries must fix their underlying

economic problems, which may require

austerity, commitment to job creation, and

other tough measures. Sudden currency

moves can also create market instability,10

or at the least, high volatility, as we have

seen in the gyrations of the S&P 500

Index since the beginning of the year.

Mohammed El-Erian, former CEO of PIMCO

and now Chief Economic Advisor at Allianz,

suggests that

sharp currency

shifts could be

characterized

as a currency

war, prompting a

retaliatory policy response,11 if not a fiscal

one.

In summary, Europe has seen Japan and

the US derive benefits from a weakened

currency that allowed them to grow

their economies through exports. The

U.S. economy has gained traction in an

environment of greater global cooperation.

A stronger dollar transfers demand to

other economies, and once they are on

firmer footing, they can again purchase

U.S. goods. Healthy global economies

ultimately are positive both for the US and

for its trading partners.

Louis is a parTner in our neW York pracTice. he can be reached aT 212.375.6944 or [email protected].

JuLes is a parTner in our neW York pracTice. he can be reached aT 212.375.6523 or [email protected].

1 http://www.forbes.com/sites/

currentevents/2014/07/02/peace-through-weakness-the-

u-s-and-japan-sputter/

1 http://online.barrons.com/articles/3-ways-a-strong-

dollar-impacts-the-global-economy-1413236429

2 http://online.barrons.com/articles/3-ways-a-strong-

dollar-impacts-the-global-economy-1413236429

3 http://www.bloombergview.com/quicktake/europes-qe-

quandary

4 http://www.marketwatch.com/story/heres-why-

a-stronger-dollar-wont-suck-the-wind-out-of-

stocks-2014-09-24

5 http://www.spokesman.com/stories/2015/jan/17/

strengthening-dollar-hurts-us-corporations/

6 S&P Capital IQ Consensus Report, January 30, 2015

7 Buck up, Profits Down: High Dollar Dents US Company

Earnings, WASHINGTON — Jan 16, 2015, By PAUL

WISEMAN and STAN CHOE AP Business Writers,

Associated Press

8 http://www.wsj.com/article_email/stocks-get-a-dollar-

hit-1422404608-lMyQjAxMTE1NTI4ODUyMDg3Wj

January 27, 2015

9 Content First, LLC, Foreign Direct Investment in the

United States, 2014 Report, www.contentfirst.com

10 http://d21uq3hx4esec9.cloudfront.net/uploads/pdf/

OTB_Nov_13_2014.pdf

11 Ibid.

“a word of cautIon: It takeS more than currency manIPulatIon to StrenGthen an economy, SomethInG to whIch JaPan can atteSt.”

“A stronger dollar also has direct, positive ramifications for U.S. mergers and acquisitions (M&A) activity in Europe, as long-term players who’ve had an eye on making European investments can now purchase them less expensively.”


§ Risk Management and Reputational Risk Reputational risk holds special significance for the not-for-

profit sector, whose public persona often determines their

ability to successfully serve their constituents and access

necessary funds.

Recent surveys of management and Boards of not-for-profit

organizations, as well as members of the public who monitor,

donate or volunteer their services, rate reputational risk as the

top governance priority for not-for-profits.

§ Cybersecurity Cybersecurity has long been a top concern for the

private sector and government agencies, but not-for-

profit organizations are now realizing the importance of

cybersecurity to their operations.

Compromised security has both short term and long term

effects on not-for-profits – resulting in loss of confidence of

donors, program participants and other third parties going

forward.

§ Internal controls on fiscal and other areasMany not-for-profit organizations believe that internal control

systems and policies are not operationally critical, are

satisfied with the controls already in place, or believe their

team members are trustworthy. They are further deterred

by the cost to implement more formal controls. However, a

good internal control system is a powerful component of a

successful organization.

Strong internal control systems can deter fraud, which assures

financial information reliability – something that is increasingly

important in this era of greater transparency and oversight.

To handle non-fiscal risks, organizations should implement an

Enterprise Risk Management process, which evaluates all of an

organization’s inherent risks on operational issues.

§ Revenue RecognitionMany organizations continue to struggle with accountability

for the timing, classification and utilization of unrestricted and

restricted revenues.

§ Budgeting and effective forecasting Benchmarking actual results against budgeting and forecasting

is more critical than ever in this environment of increasingly

constrained revenue.

§ Governance between management, Board and third partiesGovernance properly administered is the bedrock of today’s

not-for-profit organization. The way in which management

and Boards serve an organization, and their commitment

to excellence in good governance, plays a significant role in

setting a tone of integrity and ensuring the ultimate viability of

organizations and their programs.

The not-for-profit industry has recently become a focal point

for additional oversight and control by funding agencies

and government entities. It is vital that all not-for-profits

make effective, transparent governance a key aspect of their

operations.

As time goes on, these challenges will not go away – they will

only become more acute. It is imperative to establish an effective

response to them in order to ensure the sustainability of any not-

for-profit. If you think your organization may need to reconsider

its priorities in a given area, please reach out to one of our

knowledgeable professionals to discuss the best steps for moving

forward.

MiTch is a parTner and noT-for-profiT pracTice Leader in our neW York pracTice. he can be reached aT 212.375.6723 or [email protected].

ron is a parTner in our neW York pracTice. he can be reached aT 212.375.6782 or [email protected].

eThan is a parTner in our neW York pracTice. he can be reached aT 212.375.6794 or [email protected].

hoWard is a parTner in our neW York pracTice. he can be reached aT 212.375.6587 or [email protected].

eNSurINg SuSTaINabIlITy: Top 6 areaS oF FocuS For NoT-For-proFIT orgaNIzaTIoNSThereismuchanxiety,concernandtrepidationcurrentlyinthenot-for-profitindustry due to a number of factors both internal and external.

AsCPAs,wefocusourattentionnotonlyonbasicservicessuchasauditandtax,butalsoonmanagement-relatedissuesthatimpactourclients,including:

“Governance ProPerly admInIStered IS the bedrock of today’S not-for-ProfIt orGanIzatIon”

By Not-for-Profit Group

NOT-FOR-PROFIT


THUS FAR, THERE HAvE BEEN APPROxIMATELY 191,000

2013 CALENdAR YEAR ENd FORM 5500 FILINGS. OF THOSE

FILINGS, APPROxIMATELY 47,000 (25%) WERE RECEIvEd

WITHIN THE LAST 3 dAYS OF THE ExTENdEd OCTOBER

15TH dUE dATE OR AFTER THE dUE dATE. ALTHOUGH I

CAN’T SAY FOR CERTAIN WHY THOSE NUMBERS ARE SO

HIGH, BASEd ON PREvIOUS ExPERIENCE, I CAN POINT

TO THREE COMMON AREAS THAT CAUSE dELAYEd OR

LATE FILINGS ANd OFFER TIPS ON HOW TO AvOId THESE

how To avoId a laST mINuTe or laTe Form 5500 FIlINg

Three common pitfalls to look out for:

1. Not knowing your participant count as of January 1st This is the key determining factor as to whether you will

need an audited financial statement of your plan to attach

to the Form 5500. The need for an audit increases the

length of time it will take to prepare for your Form 5500

filing. The magic number to keep in mind is 120 eligible

participants. A common reason that this is missed is, when

people informally evaluate this number, they think in terms

of employees currently at their company, such as there are

only 100 employees who work here, therefore there cannot

be 120 eligible participants. What they do not consider is

that an eligible participant includes individuals who no longer

work at their company but hold a participant account balance

within the plan. If there is a high degree of turnover or the

plan has been in existence for a number of years, the number

of eligible participants who fall into this category can sway

the count significantly.

Another factor that often causes an error in the eligible

participant count is a misconception that the count as of

January 1, 2012 is the same as the end of year number that

was on the Form 5500 at December 31, 2011. This is often

not the case, as participants can become eligible on January

1st based on the entry dates and other factors outlined in

the plan document. Monitoring this number and the data

being used to generate this number, as well as discussing the

details with your service providers, can save you time and

money. The earlier you know about the need for the audit, the

more likely you are to avoid a delayed or late filing.

By Kristen Walters

“If there was a compliance error or other issue during the plan year and you are aware of such noncompliance, you should be communicating with your service providers to correct the operational failure.”

2. Not communicating with service providers timelyService providers typically request information from plan sponsors

throughout the year, but these requests are often not addressed

until right before a filing deadline, which can lead to surprises.

Example requests include the compliance questionnaires that

are sent out by third party administrators, requests for data for

nondiscrimination testing, and reviews of fidelity bond coverage.

These administrative items often uncover compliance issues and, if

not addressed timely, can cause filing delays.

3. The Plan Sponsor is not monitoring complianceThere can be a number of plan operational failures that are not

monitored properly or there can be a perception that the third

party administrator is monitoring these issues when they are

not considered responsible to do such. When these situations

are discovered, they typically create a lot of administrative

work. Common operational failures include whether the correct

definition of compensation is being used, the correct calculation

of employee and employer contributions, whether contributions

are being remitted timely to the custodian, and proper execution

of changes in employee deferral percentages. If there was a

compliance error or other issue during the plan year and you are

aware of such noncompliance, you should be communicating with

your service providers to correct the operational failure. If you are

not monitoring these issues, you should consider implementing

processes to do so.

By addressing these common pitfalls, you will develop a good

set of best practices and help you to move your filing timeline up

drastically. It is also important to communicate regularly with your

service providers.

krisTen is a senior Manager in our neW JerseY pracTice. she can be reached aT 732.205.2003 or aT [email protected].

EMPLOYEE BENEFITS


FIve hIddeN ITemS crITIcal To The SucceSS oF a New buSINeSS

When starting a new business, there are several hidden costs, whether monetary or not, that many entrepreneurs do not take into consideration. Having an understanding of these five hidden costs can largely impact the success of the business.

by Kimberly Wirzman and Jeffrey Ratkowski

This article was originally published in the March 2015 issue of MidJersey Business magazine.

ENTREPRENEURIAL BUSINESS GROUP

REGISTRATION Before a company can begin business, it must first register

with federal and state authorities and apply for an employer

identification number. For state filing purposes, some states also

will require an annual filing fee, minimum tax, franchise tax, regular

tax rates, or a combination of filing fees and taxes. Each state has

different filing requirements and how it taxes the entity. A new

business should be mindful of these cash outflow implications.

ENTITY STRUCTURE Entrepreneurs should consider the tax and legal aspects of the

various entity structures available. Below are some highlights:

* Sole proprietorship or single-member limited liability company

(SMLLC). Sole proprietors report their self-employed income on

their personal tax return and are subject to self-employment and

Medicare taxes. A sole proprietor needs to be mindful that there is

not the protection of personal assets in the case of bankruptcy that

is offered by a corporation. An SMLLC is taxed similarly but does

allow for the protection of personal assets that is not provided by a

sole proprietorship.

* Corporations. A corporation is a separate legal entity which

reports its net income or loss at the corporate level. Shareholders

own stock in the corporation and only report a gain or loss when

they sell their stock. The downfall to a corporation is the concept of

double taxation, as income is taxed at the corporate level and again

when money is taken out of the corporation by a stockholder (i.e.,

in the form of a dividend). An “S” corporation is a small business

corporation, which is organized under the subchapter S section

of the Internal Revenue Code. There are certain requirements in

order to qualify as an S corporation. An S corporation is considered

a pass-through entity, meaning the net income or losses will

be reported to each shareholder based on his or her percent

ownership and the operating agreement. Shareholders will pay

taxes on an individual level based on the net income or loss that is

reported to them for the period.

* Partnerships (general and limited). Partnerships consist of two

or more owners, and the income, losses, and credits pass through

to the partners at the individual level. Depending on the type of

business activity the partnership is involved in, the partners also

might be subject to self-employment tax. Partnerships can have

special allocations of income, losses, and credits depending on

what the partnership agreement states, unlike other entities. A

limited partnership must consist of at least one general partner.

Limited partners are generally not liable for the obligations

of the partnership unless they participate in the control of the

partnership.

VALUATION OF THE BUSINESS Funding comes primarily in the form of debt and/or equity. Usually

in start-ups, equity is the main source of funds, which needs to

be evaluated and documented in writing. Initially undervaluing

the company to attract investors and capital can lead to giving

away too much ownership that may take significant compensation

to buy back when the company grows and expands. Conversely,

overvaluing the company can detract from finding investors and

obtaining necessary capital.

BACK-OFFICE PROCESSES Businesses that have employees need to be in

compliance with various laws and regulations,

including Forms W-4 and I-9, as well as quarterly payroll tax

returns. Failure to comply with these filing requirements can lead to

substantial penalties that can have disastrous implications on the

company’s cash flows. Consideration also should be given to how

payments will be received and setting up accounts receivable and

determining whether the service or product is taxable. Managing

the timeliness of cash receipts will help paying vendors, and timely

payments can lead to purchase discounts.

ACCOUNTING SOFTWARE The best way to manage the back-office processes and the overall

productivity of the company is by utilizing a suitable accounting

software package. There are several options, from boxed packages

to customizable software systems. The more customized the

software system, the more expensive it can become to implement

and maintain. But when properly utilized, these systems can lead to

more informed decisions and, ultimately, more money.

The start-up phase of a business can be exciting, scary, and

stressful, but with professionals guiding the decision-making on

the above items, it is possible to eliminate hidden costs while

allowing the entrepreneur to focus on the operational aspects of

the business. These partnerships can further lead to long-term

friendships and, most importantly, to a successful and profitable

company.

kiMberLY is a Manager in our neW York pracTice. he can be reached aT 732.205.2024 or aT [email protected].

JeffreY is a senior accounTanT in our neW JerseY pracTice. he can be reached aT 732.475.2116 or aT [email protected].

“It IS ImPortant to keeP In mInd that, when It comeS to overhead rateS, ‘one SIze doeS not fIt all.”


weak It Security Programs may Spell disaster for healthcare organizations’ bottom linesBy William Ahrens and

Marc Grossman

Recentsuccessfulcyberattacksagainstlarge,well-knownhealthcare

organizations–suchasthewidelydiscussedAnthemsecuritybreach–areforcing

organizations of all sizes across the continuum of care (health systems, hospitals,

physicianpractices,IPAs,andpayers)togiveITsecurityincreasedattentionand

investment. Cyber attacks can wreak havoc on an organization’s reputation and

have a significant negative impact on its bottom line.

SeveraltrendspointtoadifficultfutureforthehealthcareindustryintermsofIT

security:

§ Thenumberandsophisticationofcyberattacksonhealthcareorganizations

isincreasingatadramaticrate.Arecentsurveyfoundthatover90%of

healthcare organizations reported at least one data breach over the last 2 years.

HEALTH CARE

§ An increased reliance on information technology (partially

mandated by the HITECH Act). An average hospital has 300+

systems plus electronic monitors, which presents a huge (and

ripe) attack surface for would-be hackers.

§ HIPAA and Meaningful Use regulations require healthcare

organizations to make electronic protected health information

(e-PHI) both accessible and secure.

§ “Bring Your Own Device” (BYOD) policies enhance physician

workflow, but potentially expose e-PHI and pose a challenge

for IT security staff and anti-malware tools.

§ Patient information stored in EMRs includes date of birth, SSN,

credit card numbers, addresses, and medical information,

making it significantly more valuable than other types of online

data. Recent estimates put a value of $40 - $250 for a patient

medical record vs. $.35 - $4 for a credit card record.

§ Both the size of HIPAA fines and the number/frequency of

HIPAA audits are increasing. One large health system paid

$4.8M in fines; the total cost resulting from another’s breach

was reportedly $150M.

§ CMS audits are expected to increase in 2015. One facet of the

audit may require submission of the Security Risk Analysis

documentation; one hospital is already expecting to return

$900K in MU Stage 1 payments because their risk assessment

was not completed during the year covered by the CMS audit.

Compromised security has long-term effects on healthcare

organizations due to bad press; potential HIPAA and credit card

company fines for failure to comply with security requirements;

patients suffering identity theft; and, the loss of patient confidence

and loyalty. Healthcare organizations have already spent nearly

$1.4 billion to notify more than 6.9 million individuals affected by

compromised electronic records in 2013.

While in the past, healthcare organizations often felt cyber attacks

would not happen to them, the increasing number of data breaches

over the past few years is beginning to make cybersecurity and

data privacy a Board-level governance concern. It is important

that Board members, executives and directors recognize cyber

risks as part of their duty to review risk practices, business

continuity planning, and disclosure of material risks. Healthcare

organizations handle significant amounts of sensitive information

– extremely valuable to cyber thieves – and all of this data must be

protected.

Failing to take adequate cybersecurity measures and a subsequent

data breach can lead to loss of public trust in an organization.

Unfortunately, healthcare organizations often have limited

resources to invest in information security, leading to IT systems

and security appliances that may be outdated - resulting in high

vulnerability.

Organizations must approach cybersecurity holistically, as

they would handle their financial health. It is the collective

responsibility of everyone in an organization to protect it from

cyber attacks.

preVenTaTiVe sTeps Organizations should take all necessary precautions to avoid being

the next headline and negatively impacting their bottom line.

§ Develop an IT security management program

§ Proactively address known and potential threats

§ Continuously monitor for and address human error

§ Assess the relationship between physical security and

cybersecurity

§ Maintain a security awareness program about various types of

malware threats and take action to address vulnerabilities in

your IT environment

§ Acquire and implement good defensive technologies to protect

electronic Patient Health Records

§ Develop, maintain, and enforce appropriate security policies

and procedures

§ Be ready to face a breach with an incident response plan

3rd parTY VuLnerabiLiTY assessMenTs - cosT-effecTiVe and essenTiaL § Minimize vulnerability to cyber attacks

§ Reduce impact of and shorten recovery time from an incident

§ Ensure compliance with HIPAA and MU regulatory

requirements

§ Improve system performance

§ Reduce the impact on staff by implementing more automated

tools

§ Avoid large fines and/or loss of data

WeiserMazars has substantial experience implementing privacy

and security initiatives, including performing vulnerability

assessments that meet the requirements of HIPAA and Meaningful

Use. We help you and your organization to implement the

appropriate security measures to protect against cybersecurity

threats and potential damage to your reputation.

WiLLiaM is a senior Manager in our neW York pracTice. he can be reached aT 212.375.6662 or aT [email protected].

Marc is a principaL in our neW York pracTice. he can be reached aT 212.375.6526 or aT [email protected].


GOVERNANCE, RISK AND COMPLIANCE (GRC)

meaSurINg INTerNal audITperFormaNce - whaT are The ImporTaNT meTrIcS?by WeiserMazars LLP’s Governance, Risk and Compliance (GRC) Group

backgroundIn today’s environment of increased regulation and focus on

governance and risk management, the true “value add” of the

Internal Audit (IA) function is very much a topic of scrutiny for

Boards, audit committee members, senior executives (Chief

Executive Officer, Chief Financial Officer) and virtually all IA

stakeholders. In many instances, the IA function is also being

asked to do more with fewer personnel and to leverage technology

in all their activities. While many Chief Audit Executives (CAEs)

regularly report the number of audits completed vs. planned,

the number of high risk issues identified, actual audit hours vs.

budgeted hours, and actual function costs vs. budgeted costs, the

question remains whether these measures are truly the most

meaningful. Are they enough to show that consistent value is

provided to a company?

In order to arrive at meaningful metrics, the first step is to gain

an understanding of the true “mission” of IA. While this may be

described in an IA mission statement, it is critical for the function

to adhere to best practices, generally governed by the Institute of

Internal Auditors International Professional Practices Framework

(IPPF). The IPPF, which includes the International Standards for

the Professional Practice of Internal Auditing (Standards,) is a

conceptual framework which organizes authoritative guidance

promulgated by the Institute of Internal Auditors (IIA). While

adoption of the IPPF is not mandatory, adherence to it indicates an

IA function is following the best practices in internal auditing. In

addition to including the Standards and requiring internal auditor

adherence to the IIA Code of Ethics, the IPPF includes a Definition

of Internal Auditing. This Definition and/or its key components is

generally included in the audit charter and/or mission statement

of IA functions.

This Definition states:

“Internal auditing is an independent, objective assurance and

consulting activity designed to add value and improve an

organization’s operations. It helps an organization accomplish its

objectives by bringing a systematic, disciplined approach to evaluate

and improve the effectiveness of the risk management, control and

governance processes.”

While the Definition generally drives the focus of many IA

functions, in today’s regulatory environment - and for global

organizations - there are additional requirements that IA examine

specific areas of a company and, in some instances, report out

their overall results. It is these additional requirements, as well as

other areas to which the audit committee and senior management

may direct IA’s focus, which drives actual and perceived IA value.

As many recent IA surveys have shown, audit committees and

senior management struggle with gaining comfort that true “value”

is consistently provided by IA functions. It is imperative that the

true mission of IA is understood and communication of the results

of IA activities be aligned to that mission. In this regard, identifying

the “assurance” and consulting/advisory role of IA is imperative.

For many stakeholders, it is in the consulting/advisory role that

they believe most IA value is provided. While other stakeholders

may see IA as primarily an “assurance” provider that may not have

the skills to provide consulting/advisory services.

In today’s environment, while the IA assurance function is still

important and will always continue, there is a growing trend of IA

also providing consulting/advisory services. In short, no matter

how the IA function is perceived - as assurance provider and/or

consultant/advisor, it is imperative that the CAE communicate key

metrics that are aligned in these areas.

RECOGNIZING STAKEHOLDERSWith the mission of the IA function clearly understood in order to

determine what metrics will assist in showing IA value, the various

stakeholders of IA must be identified. While we have previously

alluded to audit committee and senior executives figure 1.1 below

depicts the many stakeholders of IA.

Because the CAE is clearly a stakeholder, he or she wants to make

sure that the metrics show that the IA function has a clear mission,

includes best practices in the field of internal auditing and the IA

output will be perceived to provide consistent value to stakeholders.

While the audit committee’s goals should be aligned to the CAE, as

with management there may be specific areas where it believes a

great deal of value resides. These can include feedback and focus

on Information Technology and emerging risks, the review of an

organization’s risk management processes, or the ability to have

risk-focused IA personnel move into other areas of an organization.

Individual auditees are often focused on having consistent

recommendations that will assist in meeting their operational and

strategic objectives. In addition, the external auditor is generally

concerned that competent IA personnel will assist not only in

completing key control audits, but also in completing external audit

assistance work – which helps with their attestation needs.

When we recently discussed expected IA value with audit

committee members, executive management and auditees, all

responses included important aspects of an IA function’s mission.

Just some of these included:

§ “The value of Internal Audit to me is I don’t want surprises,

Internal Audit assists in reducing regulatory, reputational

and financial surprises.”

§ “Internal Audit helps set a tone of accountability throughout

the organization.”

§ “Internal Audit helps reduce the external audit fee and

provides a level of assurance that we have proper controls

in place and that they are operating effectively.”

§ “A key value Internal Audit provides is the issues they identify


and how they partner with management to arrive at viable actions to address those issues.”

§ “In today’s world, I look not only for Internal Audit to provide assurance over controls but to also provide input to help our

organization achieve our objectives and overall strategy.”

§ “A successful Internal Audit function is made up of people with the right skills, who are business partners with management and

provide insight into identifying and addressing risks of the company, including emerging risks. It is this incubator of risk-focused

people who we also look to enter the business and assist the company in achieving its long term objectives.”

keY MeTricsWhile there may be different areas of focus and corresponding priorities for various stakeholders, a common measure for IA value

should also address:

§ Presence of robust IA policies and procedures which drive IA activities

§ Skillsets, abilities and relationships of IA personnel

§ Evidence that the IA focus and results are aligned to the organizational primary risks

Having a true “Balanced Scorecard” which addresses the areas noted, shows IA focus, and one that is used to communicate results,

helps demonstrate the consistent value of IA. Some of the key measures in each of the three areas are summarized in figures 1.2, 1.3

and 1.4.

Figure 1.2-Robust Internal Audit Policies and Procedures

*in The beLoW charTs – X represenTs a prioriTY area for The appLicabLe sTakehoLder.

Figure 1.3-Skillsets, Abilities and Relationships of Internal Audit Personnel

Figure 1.4-Alignment of Internal Audit to Organizational Primary Risks



presence of robusT inTernaL audiT poLicies and procedures Which driVe inTernaL audiT acTiViTies

For CAEs it is imperative that they

have written policies and procedures

that are aligned to the IPPF, including

internal quality control procedures, and

the completion of an External Quality

Assessment Review (QAR). While the

QAR has been a requirement for many

years, a number of organizations have

either not had QARs completed, or they

are not always completed within the

required 5 year time frame. Another

key area is assuring that all regulatory

IA requirements are memorialized and

completed on a timely basis.

Other core metrics include having an

established process under which any

“High” rate audit issues/recommendations

are addressed within a reasonable

timeframe (e.g. 60 days of report issuance)

and that all report issues are addressed

with management actions within no longer

than 30 days from target completion date.

One item many auditees, senior

management and audit committee

personnel look at is the number of audit

issues addressed before the final report

is issued. When this is done, evidence of

true partnering by IA with management is

evident.

There is also an increased focus on being

able to deliver methods and tools that

the organization will be able to re-use

independently moving forward. Generally

in these instances, using automated tools

and/or a designed program, IA establishes

a process to identify/analyze risks to an

organization (review and analysis of third

party data, etc.) that can be implemented

by the business and therefore allowing

the “process” to be examined by IA in the

future.

Some other key metrics include;

§ Reports issued within XX days (e.g.

45 days) of fieldwork

§ Actual annual audit plan hours vs.

budgeted hours

§ Number of completed audits vs.

planned audits

§ Consistent use of surveys at the

completion of each audit to obtain

and report on auditee management

feedback

§ Consistent use of Computer

Assisted Audit Techniques (CAATs),

continuous auditing and related

reports produced to show value in

identifying anomalies within entire

populations

skiLLseTs, abiLiTies and reLaTionships of inTernaL audiT personneL

Two highly useful means of helping

CAEs in carrying out IA activities include

not only having personnel with various

certifications (CIA, CISA, CRMA, CFE, etc.),

but also maintaining a matrix of areas

of expertise by person and a related gap

analysis. This gap analysis is a driver

for filling internal audit positions and it

uncovers any need to seek outsourcing

of Subject Matter Experts. Moreover, an

important value add to organizations is

the development of relationships between

IA personnel and company management.

This enhances the IA personnel’s

understanding of the business and their

ability to add value. Measurement of

formal feedback from management on

each auditor is obtained on an annual

basis.

An excellent measure of IA value is the

number of personnel that

have been transferred from

IA to other positions in an

organization. Having IA

serve as a talent incubator

for the organization as a

whole is a consistent positive

for many organizations.

Also gaining momentum

in many organizations are

rotation programs where specialized,

skilled personnel from other departments

transfer into the IA function for 12 to 24

months. In many organizations, another

value indicator is the number of “special

requests” relating to key initiatives

on which management asks for IA

involvement.

Finally other key metrics include the

number of auditors per number of

employees as well as the number of

auditors per annual revenue dollars.

eVidence ThaT ia focus and resuLTs are aLigned To The priMarY organizaTionaL risks

The final area for measuring IA value is

the daily focus of the IA function. That

is, helping an organization accomplish

its objectives by assisting management

in improving the effectiveness of the risk

management by focusing on the primary

risks of an organization, while at times

might not be easily measured, should be a

key driver of IA activities. While this may be difficult to quantify, given IA’s technical abilities and their forum to drive change in an organization

it is imperative that IA consistently communicates to all stakeholders how they contribute to identifying risks and assuring they are

sufficiently addressed.

One of the main deliverables that assist in this process is a formal reconciliation of Internal Audit, Sarbanes Oxley, Risk Management,

Compliance and external audit risks and coverage. Some companies complete this via a formal document which is updated on a regular

basis. This document details organizational risks, as well the processes in place to address the risks. Linking each IA report finding to major

risk areas of the organization is a clear indication of value received. This linkage may include highlighting the impact of the audit issue and

overall audit result to the risk as a whole. This includes identifying risks that exist in attaining an organization’s strategic objectives.

Since IA is uniquely qualified in that they understand the risks of the organization, any audits that directly review an organization’s risk

management process or Information Technology risks (cybersecurity, etc.) should be highlighted to all stakeholders. Moreover, with the

increased emphasis on emerging risks and fraud, any audit committee or senior management update on emerging risks and statistics on

number of fraud related report findings is also a value add to key IA stakeholders.

SUMMARYWhile many IA functions provide consistent value to organizations, the process of measuring and communicating this value is not “one

size fits all.” As such, to ensure both the reality and perception of consistent value being provided, IA needs to be focused on their mission

as well as how they serve and report results to their various stakeholders. Attending to the needs of the stakeholders should assist in the

communication and level of detail showing consistent IA value. A balanced approach is recommended where updates and related statistics

are maintained and communicated, focusing on measures that relate to adherence to robust IA policies and procedures, the abilities of IA

personnel and IA’s focus on the company’s primary risks. If this is done, evidencing IA value will surely be more straightforward and better

measured!

biLL is a parTner in our pennsYLVania pracTice. he can be reached aT 267.532.4328 or aT [email protected].

“two hIGhly uSeful meanS of helPInG caeS In carryInG out Ia actIvItIeS Include not only havInG PerSonnel wIth varIouS certIfIcatIonS (cIa, cISa, crma, cfe, etc.), but alSo maIntaInInG a matrIx of areaS of exPertISe by PerSon and a related GaP analySIS.



CONTINUOUS AUDITING - A DELICATE CHEMISTRY

conTinuous audiTing Vs. conTinuous MoniToring The concept of CA has been around for many years. The AICPA

report “Special Committee on Assurance Service” mentioned it

for the first time in 1995. The necessity for continuous auditing

arises from a need for daily reporting and a demand for

more reliable, valid and just-in-time information for effective

decision-making.

Continuous Auditing - The automatic method used by persons

who are able to provide assurance such as an internal auditor or

an independent auditor, to perform control and risk assessments

and to collect auditing evidence on a frequent basis. Continuous

audit activities heavily rely on technology to automate the

identification of exceptions or anomalies, analyze patterns,

review trends, and test controls. Real-time continuous auditing is

especially useful for high-risk enterprise processes

Continuous monitoring, in comparison, is a process under

Operational management used to ensure that management’s

policies, procedures, and key business processes are operating

effectively. CM is used as part of the control structure in

the monitoring role promoted by COSO. CM detects and

corrects process irregularities and helps implement process

improvements (adequacy and effectiveness of internal

controls). This permits ongoing insight into the effectiveness

of controls and the integrity of transactions. For instance,

management may identify critical control points and implement

automated tests to determine, on a continuous or frequent

basis, if these controls are working properly.

There are certainly similarities between Continuous Auditing

and Continuous Monitoring as they both use the same

automated techniques, but they are two different processes,

with two different, complementary approaches. The primary

difference is related to ownership of the process. Continuous

monitoring is management driven (first two lines of defense)

while continuous audit is audit driven (third line of defense).

Although many of the continuous monitoring techniques used

by management are similar to those performed by internal

auditors, continuous auditing enables auditors to evaluate the

By WeiserMazars LLP’s Governance, Risk and Compliance (GRC) Group

CONTINUOUS AUdITING (CA) HAS BEEN IN THE MINdS OF AUdIT COMMITTEES ANd CHIEF AUdIT ExECUTIvES

(CAE) FOR MORE THAN TWO dECAdES. WHILE THE OvERALL CONCEPT IS WELL UNdERSTOOd, SOMETIMES IT

IS CONFUSEd WITH CONTINUOUS MONITORING (CM). A dISTINCTION BETWEEN THESE TWO HAS TO BE MAdE

TO UNdERSTANd HOW CA COMPLEMENTS CONTINUOUS MONITORING ANd THE UNIqUE BENEFITS OF CA. THE

PARTICULAR APPROACH A CAE TAkES IN CONTINUOUS AUdITING WILL BE INFLUENCEd BY THE MATURITY ANd

SOPHISTICATION OF THE ORGANIzATION, REqUIRING A CERTAIN LEvEL OF TAILORING TO ACHIEvE MAxIMUM

vALUE. WE WILL ALSO dISCUSS THE STEPS TO SUCCESSFULLY IMPLEMENT A CONTINUOUS AUdITING INITIATIvE.

adequacy of management’s monitoring function and identify

and assess risk areas. As the reliance by Internal Audit (IA) on

the CM process increases, the assessment is not necessarily

performed on a continuous basis, but more periodically as any

other audits.

Another difference is in the type and sufficiency of evidence

generated by continuous monitoring systems. Information

provided by continuous monitoring systems can give auditors

significant information about a process, system or data, but

due to its indirect nature, that information alone would not be

sufficient in a continuous auditing engagement. The IIA, in its

GTAG (Global Technology Audit Guide) related to Continuous

Auditing, details the CA/CM inverse relationship in regard to the

amount of effort that management and the audit function put,

respectively, into CM/CA. In many instances, IA led a continuous

auditing initiative that was later transferred to management to

become part of the continuous monitoring process. The auditor

would not be part of this new control function as, in that case,

his independence would be impaired.

An organization can obtain great benefits in implementing CM

and CA together.

benefiTs of conTinuous audiTing

While continuous auditing and its benefits have been known for

many years, actual implementation by the audit function has

been low, although formal demands have often been made by

management and audit committees. With CA, the role of the auditor

can go beyond auditing procedures in which irregularities are

investigated. However, this requires detailed auditing processes

involving value judgments and professional skepticism.

Periodic audits no longer fit the need for continuous assurance in

today’s fast paced business environment. In order to adapt to this

changing environment, internal audit, pushed by audit committees

and supported by management, has to move to a more dynamic

risk-based approach - assessing changing levels of risk on an

ongoing basis, being more actively involved in risk management

throughout its assessment and acting as its implementation

advocate. CA results in more comprehensive and continuous

assurance with greater coverage across the organization as long

as the CA implementation is done consistently across primary and

secondary processes. It will also enable greater accountability of

the management and business owner.

Technology enables internal audit to analyze large volume of data in

less time, more efficiently, while improving quality. Some practical

benefits are a deeper audit for the same cost, review of exceptions

only, more alternatives in choosing the approach and an increase in

transparency for the auditees. To maximize its value at the earlier

stages of implementation, real time CA should focus on high risk

areas. The immediate benefits of CA implementation are more

cost effective audits that free up resources that can be dedicated to

other, more valuable areas.

This dynamics approach to risks and control as well as the

redistribution of responsibilities establishes a new relationship

between the audit function and management, improving the

perception of the added value brought by internal audit. A better

understanding of audit and management’s respective priorities on

risk and control issues can also be a benefit of a sound CA.

In terms of continuous auditing associated with continuous

monitoring, improved areas include providing reasonable

assurance that objectives of COSO ERM around reliability of

reporting and compliance with laws and regulations will be

met (Sarbanes-Oxley and beyond) ; better business efficiencies


“Technology enables internal audit to analyze large volume of data in less time, more efficiently, while improving quality.”


improving the bottom line; and increased management insight

regarding risk. It also supports audit independence by ensuring

that auditors have sufficient access to, and understanding of, key

business information systems.

Finally, a proper implementation of CA, with clear objectives,

extensive understanding of data, and properly defined outputs

helps in discovering and analyzing patterns, anomalies and

outliers that increase the probability of detecting fraud.MaTuriTY and sophisTicaTion MaTTers Which conTinuous audiTing

Once continuous auditing has been included as an important

aspect of the Internal Audit (IA) plan, with the support of

management; the CAE needs to determine which point of the

spectrum of continuous auditing is the most suitable for the

organization. This is primarily based on the sophistication and

maturity of the organization in terms of its two first lines of

defense.

An organization with limited or scattered continuous monitoring

will put more emphasis on continuous controls assessment

as part of continuous auditing following IIA Attribute Standard

2130, which requires Internal Audit (IA) activity that assists the

organization in maintaining effective controls. The continuous audit

activities for this type of organization will most likely be control

based, using detailed or transactional real-time or near real-time

financial data. The objective is to provide control assurance to

management and the audit committee. The continuous control

assessment addresses not only the identification of control

deficiencies, but also fraud, waste and abuse detection (covered

by IIA standard 1210.A2 and AICPA SAS No 99). Because the

implementation of continuous auditing might be complex (see

following section) for an internal audit department with limited

experience, a step-by step approach is suggested. Internal audit

should start with Computer Assisted Audit Techniques (CAATs)

on some primary processes. Then, when the process is mastered

move to continuous auditing. As a result, internal audit will

leverage continuous auditing in order to strengthen the continuous

monitoring and review environment of the organization. As

many continuous auditing processes are similar to continuous

monitoring techniques, internal audit may ultimately transfer the

activity pertaining to continuous control assessment to become

part of the control monitoring owned by management. Although

the continuous auditing concept has been around for more than

20 years, many internal audit departments are still at the earliest

stage of implementation, focusing on CAATs and starting to move

to continuous control assessment.

Internal audit activities in more mature and sophisticated

organizations with strong continuous monitoring and performance

management will put less emphasis on continuous control

assessment. They will perform periodic audits on the effectiveness

of management’s continuous monitoring. A risk based approach

using continuous risk assessment will be preferred by these

organizations as discussed by the IIA Standard 2120 on the

evaluation of effectiveness and improvement of risk management

processes. Various ongoing sets of financial and operational

data will be analyzed in order to dynamically update the risk

assessment and perform audit recommendation follow-ups by

verifying their implementation. Analysis of trends and comparison

between different periods or against a baseline will provide

valuable information on risk profile evolution and identify new

risks. This data driven risk assessment will dynamically impact the

audit plan. The CAE might update the audit plan if risks in certain

areas are evolving favorably or unfavorably. Usually, continuous

risk assessment is more easily implementation when it leverages

of the ERM function.

In the absence of fraud detection activities performed by

management (Special Investigation Unit (SIU) for example in

insurance companies), these mature organizations may perform

real-time or near transactional review.

iMpLeMenTaTion of conTinuous audiTing

No matter the maturity of the organization, as with any other

process/system, the continuous auditing initiative should be

conducted following a step-by-step approach to achieve successful

implementation.

1. Strategic plan A strategic plan should be developed, identifying the key

stakeholder, the overall objectives of the initiative, and the success

criteria for measurement purposes. This document will be used for

presentations to the audit committee and management.

2. Define the scope and objectives

The implementation of the CA process has to be done with a risk-

based approach. As implementation can be long, it is mandatory

to identify the key areas in which the implementation of CA will

prove both efficient in terms of risk management and ease of

implementation. To maximize the value, CA should be used to test

controls, identify and assess risks and detect fraud. Once the areas

have been identified, the internal audit team has to determine,

with management’s assistance, the controls and any continuous

monitoring already in place. Like any other project, buy-in from

management is essential for success. These parties need to work

together to define the audit requirements, which will serve as a

basis to the development and IT teams in listing the requirements

for the technical solution.

Although the benefits of CA are substantial, the investment in terms

of time and money can be significant, especially in sophisticated

and mature organizations. As such, before starting a large project

many organizations use CAATs as a trampoline to continuous

auditing.

One major potential road block at this stage is the absence

of consensus between parties regarding the scope of the

contemplated initiative. A consensus should be obtained based on

well-defined objectives, explanation of the benefits, the return on

investment (ROI), and a realistic scope. A too-broad scope will scare

some stakeholders due to the potential for an unsustainable level

of resource diversion.

3. Defining the requirementsThe Chief Auditing Executive (CAE) and the internal audit team

have to list controls that will be implemented to address the

targeted risks. Then, the team should identify the applications

containing the data needed to implement the continuous

auditing solution and work along with the data owner to obtain

authorization to use the data. The IT department will then be able

to access the data. The access to this data will be facilitated by

the support previously given by management. The internal audit

team will need to understand the business processes and their

supporting information systems, using existing audit and technical

documentation, conducting interviews with business process

owners and the IT team. The deeper the knowledge, the better

the final understanding of risks and controls will be. The internal

team’s skills and techniques in the areas of business processes,

analysis and IT systems are equally important for the success of

the implementation. The control selected has to be in accordance

with the internal team’s technical knowledge, as well as the

development and maintenance capabilities of the IT team. The

frequency with which every control is performed can be set based

on the risk factors.

The CAE should define the objectives of the analysis; determine a

non-critical or non-complex business process that will be a pilot

for the initiative. To be successful, the CAE would require an IT

auditor with a sufficient knowledge of data analysis as well as a

solid understanding of the organization’s systems and business

processes.

In addition to control testing, IA will identify fraud risks that can be

detected by transactional continuous auditing. The requirements

and the process will be similar to controls assessment testing. The

right definition of the tests will limit the volume of false positives as

well as the volume of exceptions to be investigated.

Failing to understand the business processes or a lack of necessary

technology skills in IA could dramatically impact the outcome of the

project and lead to significant cost and time overrun.

4. Retrieving and Using DataOnce the project team has defined the scope, the objectives, and

the requirements, the next step is to retrieve and use the data. The

technology that will be used by the auditor to automate the analysis

should be carefully chosen to ensure success. The main drivers of

this selection are the type of data source (existence of interface,

ETL), the volume of data to be analyzed, format (old format or


“Although the benefits of CA are substantial, the investment in terms of time and money can be significant, especially in sophisticated and mature organizations. As such, before starting a large project many organizations use CAATs as a trampoline to continuous auditing.”


proprietary), and with the recent advent of Big Data, velocity

(timely capture of data). The software should also be scalable and

flexible enough to accept new sources of data.

Access to data with the appropriate rights (read only) will be given

to the audit team. Depending on the objectives, the access level

would vary from database access (dump), to running queries,

scripting and reporting platform access.

Retrieving data from the source system should not impact

production. The auditor will ensure throughout the process the

completeness and integrity of the data retrieved, and checks will

be done before and after the transfer to the auditor. The set of

data will be analyzed through repeatable tests with a software

package such as ACL, IDEA, or SaaS. Scripts and routines should

be developed in order to speed up the analysis.

The timeliness of data as well as the frequency of the data

retrieval should be aligned with the project objectives.

Obtaining data is one of the most common challenges in

continuous auditing projects. More often than not, the auditor

is faced with data that is incomplete, inconsistent, or not

accessible due to its confidentiality (HIPPA, PII). The atomicity of

system source in case of a decentralized IT environment is also

challenging. Big Data has added another layer of complexity,

increasingthe difficulty of identifying the appropriate data and not

being overwhelmed by sheer volume.

These challenges can be overcome by precisely defining, at the

earliest stage of the project (during requirements), the data sets

that need to be accessed. This requires having a deep knowledge

of the organization’s systems, database and data confidentiality.

More importantly, data owners should be part of the team. The

IA should not seek more data than needed (i.e. excessive data

granularity that will not be necessary for the tests).

5. Analysis and reportingBased on the sophistication and maturity of the organization, the

analysis will be conducted for the purpose of continuous control

assessment, transaction level testing for fraud detection purposes,

continuous risk assessment, or a combination of these three

elements (continuous auditing spectrum). The set for the analysis

will be defined in order to meet the objectives. It could encompass

trends, rule based exception reports, comparisons, clustering and

so on.

The results of the analysis should be prioritized base on the risk

profile. Usually, they are sent to business process owner for

investigation of the exceptions found. This process would be done

iteratively in order for the team to be increasingly conformable and

the scope expanded to other areas.

The final results is then part of the overall risk assessment,

reported to the audit committee.

Common risks at this stage are inconsistent or inappropriate

design of the analysis (inappropriate frequency, set of data, test

not aligned with objectives, etc.) or misinterpretation of the results

(false positive, misunderstanding of data, lack of understanding of

the risk). These risks are usually addressed by a proper alignment

with objectives and a deep understanding of the risks/controls to

be tested/assessed.

6. MeasurementInternal audit departments are often challenged by management

regarding the ROI of the continuous auditing initiative. As part

of the project, the team should define and implement Key

Performance Indicators in order to provide to management

objective results that will be compared will predefined criteria.

This will help demonstrate, if the continuous auditing initiative

is implemented and executed properly, the savings (costs and

time) and benefits. These criteria could include risk assessment

evolution, level of assurance per risk (manual testing vs automated

testing), number of controls tested, number of exception reported,

time saving in audits, or reallocation of time to added value audits.

concLusion

The road to a successful implementation of continuous auditing

is full of challenges. All project stakeholders need to understand

what their responsibilities are in the continuous auditing and

continuous monitoring processes and where these processes

will be implemented. While the true ROI of the initiative will not

be measured in the short term, the value of continuous auditing,

no matter the maturity or sophistication of the organization,

is demonstrated over time by measurement against objective

criteria - the early detection of fraud and the timely adaptability

by IA to emerging risks. Full buy in by management, detailed

planning and strong alignment between defined requirements

(data and resources) and organizational objectives are key to a

successful implementation. Finally, deep technology knowledge

and understanding of the organization’s information system by the

IA team is equally critical.

biLL is a parTner in our pennsYLVania pracTice. he can be reached aT 267.532.4328 or aT [email protected].

nicoLas is a principaL in our neW York pracTice. he can be reached aT 646.225.5983 or aT [email protected].

TAX

2015 buSy SeaSoN: whaT’S TreNdINg Now?

EveryyearthereissomechangeinthetaxlawthatmakestaxseasonunbearableforCPAs,attorneysandtaxpreparersalike.In2014,itwastheimplementationofthe3.8%NetInvestmentIncomeTax.In2015,itwillbeRepairRegulations,thelastminutepassageofthe“TaxIncreasePreventionActof2014”,ThePatientProtectionandAffordableCareActmandate,andchangesinNewYorkforestateandgifttaxplanning.Eachofthesewillrequireasuperhuman effort to simply be in compliance with the changes.

The Tangible Property and MACRS RegulationsTheTangiblePropertyandMACRSRegulations,morecommonlyreferredtoasthe“RepairRegs.”,willbeoneverytaxpreparer’smindasmanybusinessreturnsfiledthisbusyseasonwillrequireaForm3115.TheimportanceofcomplyingwiththeseRegulationscannot be understated.

By Al Colanero,

and Karen A.

Marshall



TAX

the associated return, including extensions.

§ Accounting method changes related to the above Regulations

are considered an Automatic Change.

§ As a significant number of returns will require a Form 3115,

we suggest creating a template and adding it to your tax

compliance checklists.

§ Circular 230 implications: CPAs preparing a federal return

without a Form 3115 and/or certain required elections could

be in violation of Circular 230 unless not required by Rev. Proc.

2015-20.

Revenue Procedure 2015-20 On February 4, 2015, the IRS issued Rev. Proc. 2015-20 granting

significant relief to Small Business Taxpayers (SBT). A SBT is

defined as a business with total assets of less than $10 million and

average annual gross receipts of $10 million or less for the prior

three taxable years. Under Rev Proc. 2015-20, SBT are permitted to

make certain tangible property changes in methods of accounting

with an adjustment under IRS Sec 481(a) that takes into account

only amounts paid or incurred, and dispositions, in taxable years

beginning on or after January 1, 2014 without filing a Form 3115.

Effectively, SBTs making these changes in method of accounting for

the first taxable year that begins on or after January 1, 2014, may

elect to make the change on a cut-off basis.

THE TAx INCREASE PREVENTION ACT OF 2014A large number of tax provisions that expired as of the beginning of

2014 have been given a retroactive one-year extension by Congress.

Not all of the expired provisions were extended, but the ones that

were will continue to provide relief to both individual and business

taxpayers.

BackgroundThe House of Representatives passed The Tax Increase Prevention

Act of 2014 (commonly referred to as the “tax extenders”) in early

December 2014. The Senate approved the bill on December 16th

and the President signed the bill on December 19th.

Some highlights of key provisions and extensions § Section 179: the amount of qualifying property eligible for

expense remains at $500,000 and the cap on total investment

in eligible assets remains at $2,000,000.

§ 50% bonus depreciation: for certain qualifying assets

(MACRS property of 20 years or less or qualified leasehold

improvement property) an additional 50% first year bonus

depreciation is permitted.

§ 15-year straight-line cost recovery life for qualified

leasehold improvements, qualified restaurant buildings and

improvements, and qualified retail improvements

§ Discharge of indebtedness on principal residence continues to

be excluded from the borrower’s taxable income.

(A complete list can be found at: https://www.congress.gov/

bill/113th-congress/house-bill/5771)

Due to the late passage of the tax extenders, it may be prudent for

tax advisors to revisit research and advice given to clients during

the year. As these provisions were a one-year extension, effective

December 31, 2014, they have already expired. Accordingly, in 2015,

Congress will return to the negotiating table to address the recently

expired tax provisions and extensions.

On a positive note, the IRS has announced that the 2014 filing

season will not be delayed by tax extenders legislation. The IRS

has started accepting returns electronically and began processing

paper returns on January 20, 2015.

THE PATIENT PROTECTION AND AFFORDABLE CARE ACT (PPACA)Health care reform was enacted in 2010 to expand the provisions of

health insurance to more Americans. Two important provisions took

effect in 2014: the individual mandate and the premium tax credit.

The employer mandate was scheduled to take effect in 2014, but

the IRS delayed it until 2015.

Shared Responsibility for IndividualsBeginning in 2014, PPACA requires individuals to:

§ Be covered by a health plan that provides minimum essential

coverage,

§ Qualify for an exemption from the coverage requirement; or

§ Pay a shared responsibility payment (the individual mandate).

Minimum Essential Coverage An individual who is covered by health insurance that provides MEC

will not be required for the Shared Responsibility payment. MEC

includes the following:

§ Health care coverage provided by the taxpayer’s employer or

purchased by a self-employed individual.

§ Health insurance coverage purchased through the Health

Insurance Exchange.

§ Most government sponsored health coverage including

Medicare, Medicaid, and others.

§ Certain types of coverage purchased directly from an insurance

company.

ExemptionsThe statute exempts nine categories of individuals from the

requirement to carry MEC or make a payment. These include the

BACKGROUNDPrior to the issuance of new regulations, deciding whether an

expenditure was considered an ordinary repair or capital asset

was largely determined by case law such as INDOPCO Inc. v.

Commissioner and a number of Revenue Rulings. The Internal

Revenue Service and Treasury Department’s collective goal

in issuing the regulations was to reduce controversy and give

taxpayers clear guidance. Accordingly, after a long legislative

process that started in August 2006, final regulations became

effective September 19, 2013.

Policies and Methods The final regulations generally apply to taxable years beginning on

or after January 1, 2014. The regulations provide the following:

§ Materials and supplies with a cost less than $200 are now

deductible.

§ Election to capitalize materials and supplies is now limited to

rotable and temporary spare parts.

§ Materials and supplies are now protected by the deminimus

safe harbor election.

1. Safe harbor threshold is $500 for taxpayers without an

applicable financial statement and $5,000 for taxpayers

with an applicable financial statement.

2. Requires a written accounting policy.

3. Requires the same accounting treatment for both book

and tax purposes.

§ Definition of a unit of real or personal property including

major components and substantial structural parts: A unit of

property is defined in Reg 1.263(a)-3(e) and is based upon a

functional interdependence standard. However, special rules

are provided for buildings, plant property, network assets,

leased property and improvements to property.

§ The definition of improvements include: betterments,

restorations, and adaptation of tangible property which

require capitalization. In general, a taxpayer must capitalize

improvement related to the betterment, restoration, or

adaptation of a unit of property.

1. Betterment

§ Fixing a material condition or defect that existed

before the acquisition of the unit of property or arose

in the production of the unit of property.

§ Material addition, enlargement, expansion, or

extension that increases the capacity of the unit of

property.

§ Materially increase the productivity, efficiency,

strength, quality or output of a unit of property.

2. Restoration

§ Replacement of a component of a unit of property.

§ Restoration of damage to a unit of property.

§ Returning a unit of property to its ordinary efficient

operating condition.

§ Rebuilding to like new condition.

§ Replacement of a part or combination of parts that

comprise a major component or substantial structural

part.

3. Adaptation

§ When a taxpayer adapts a unit of property to a new or

different use, the taxpayer must capitalize the costs

associated.

§ Election to capitalize repair and maintenance costs: A taxpayer

may elect to capitalize repair and maintenance costs provided

the books and records reflect the same tax treatment.

§ Routine maintenance safe harbor: Under the safe harbor the

cost of performing certain routine maintenance activities

on a unit of property, including a building structure or one

of its enumerated components, are deductible as routine

maintenance.

§ Safe harbor for small taxpayers with buildings: Qualifying

taxpayers, with gross receipts less the $10 million for the

three preceding years, may elect to deduct the cost of repairs,

maintenance, improvements and similar activities if the cost

does not exceed the lesser of 2% of the unadjusted cost basis

of the eligible property or $10,000. An eligible building must

have an unadjusted basis of $1 million or less.

Form 3115, required compliance, and accounting method changes § Rev. Proc. 2014-16 provides guidance on the final repair

regulations, while Rev Proc. 2014-54 provides guidance on the

MACRS regulations.

1. Special rules exist for small taxpayers with gross receipts

of $10 million or less for the preceding three years.

§ In general, unless a method was not previously established,

taxpayers will be required to file Form 3115 to be in

compliance.

§ The Regulations and related Sec 481(a) adjustment will

generally apply to amounts paid or incurred in taxable years

beginning on or after January 1, 2014, or at the taxpayer’s

option, amounts paid or incurred in taxable years beginning on

or after January 1, 2012.

§ The due date of Form 3115 is same as the filing due date of


TAX

payments would need to be paid with the taxpayer’s extension.

PPACA-related Tax Forms for 2014 § Form 1040, Line 61 – complete this line to check the box

for full-year coverage, or compute the shared responsibility

payment to include with the taxpayer’s federal return.

§ Form 8965 (Health Coverage Exemptions) – use this form to

report a coverage exemption granted by the marketplace or to

claim coverage exemption on a taxpayer’s return. In addition,

use Form 8965 to report the calculated shared responsibility

payment for months during the year that the taxpayer or

member of the taxpayer’s tax household did not have health

insurance or a coverage exemption.

§ Form 1095-A – Taxpayers will receive this form from the

Health Insurance Exchange reporting information about

the health coverage policy, including dates of coverage and

total monthly premiums for the policy in which the recipient

or family members enrolled. The Form 1095-A provides

information the taxpayer needs to complete Form 8962.

§ Form 8962 - Premium Tax Credit information required on this

form will determine if the Taxpayer is entitled to the credit.

If a Taxpayer received a Form 1095-A, Form 8962 must be

completed.

NY ESTATE AND GIFT PLANNING ISSUES As part of the 2014-2015 Budget, New York drastically changed its

Estate and Gift tax laws. New York has enacted estate tax reform

that increases the estate tax exclusion threshold, over a five year

period, from $1 million to $5.25 million. After January 1, 2019,

the basic exclusion will be indexed for inflation and calculated to

be equal to (and in the same manner as) the federal exclusion.

However, there is a catch; large estates that exceed the exclusion

by 5% will lose the exclusion entirely. As a result the exemption is

forfeited and the taxes on the full value of the estate are due.

The highest NYS Estate tax rate is 16%, which will be indexed for

inflation.

Effective April 1, 2014 New York conforms with the Federal

provisions related to alternate valuation, qualified domestic trust,

and qualified terminable interest property elections.

Effective April 1, 2014 the New York State generation-skipping

transfer tax no longer applies to distributions or terminations made

after March 31, 2014.

Effective April 1, 2014. New York’s estate and gift tax law that

requires all taxable gifts made by a New York resident after March

31, 2014, to be included as part of the gross estate for purposes of

calculating the New York estate tax.

The new law also adds a limited 3-year look back period for gifts

made between April 1, 2014 and Jan. 1, 2019. Specifically, if a NY

resident dies within three years of making a taxable gift, the value

of the gift will be included in the decedent’s estate for purposes

of computing the NY estate tax. The following gifts are excluded:

(1) gifts made when the decedent wasn’t a NY resident; (2) gifts

made by a NY resident before April 1, 2014; (3) gifts made by a NY

resident on or after Jan. 1, 2019; and (4) gifts that are otherwise

includible in the decedent’s estate under another provision of the

federal estate tax law.

CONCLUSIONComplying with the Repair Regs., Tax Extenders, PPACA and

changes to NY Estate and Gift tax law will prove to be challenging.

aL is a senior Manager in our Long isLand pracTice. he can be reached aT 516.620.8551 or [email protected] .

karen is a Manager in our Long isLand pracTice. she can be reached aT 516.620.8760 or [email protected]

following:

§ Short coverage gap–individuals who are uninsured for 3

consecutive months or less during the year.

§ Unaffordable coverage–the lowest-priced coverage available

would cost more than 8% of the individual’s household

income.

§ No filing requirement–individuals who do not have to file a tax

return because their income is too low and below the filing

threshold.

§ Indian tribes–members of a federally recognized tribe are

eligible for services through an Indian Health Services

provider.

§ Members of a recognized health care sharing ministry.

§ Religious conscience–members of a recognized religious sect

with religious objections to insurance.

§ Incarceration–individuals either detained or jailed, and not

being held pending disposition of charges.

§ Not lawfully present in the United States–the individual is

not a U.S. citizen or a resident alien; or the individual is a U.S.

citizen who spent at least 330 full days outside of the U.S.

during a 12-month period or was a bona fide resident of a

foreign country (or countries) for a full tax year.

§ Hardship–a health insurance marketplace certifies that the

individual suffered a hardship and cannot obtain coverage or

would have to pay an excessive amount for coverage.

Calculating and Reporting the Shared Responsibility Payment/”Penalty”The required payment is determined on a monthly basis. It equals

the lesser of (1) the monthly penalty amounts for each individual

in the family (up to three individuals); or (2) the monthly national

average bronze plan premiums for the family as offered through

the exchanges.

The monthly penalty amounts are the greater of: (1) the flat dollar

amount, or (2) the excess income amount.

The flat dollar amounts are $95 in 2014, $325 in 2015, or $695 in

2016, per person up to three individuals for a family. The amounts

after 2016 will be indexed for inflation. For individuals 18 and

under, these amounts are reduced by half. The excess income

amounts are the excess of the taxpayer’s household income over

the taxpayer’s filing threshold, multiplied by a percentage:

§ 1.0 percent for 2014;

§ 2.0 percent for 2015; and

§ 2.5 percent for years after 2015

Taxpayers will be expected to report their liability on Line 61 of

Form 1040 for the 2014 tax year. The payment is payable upon

notice and demand from the IRS. It should be noted, however, that

the IRS cannot seek any criminal penalties or place a lien or levy

on the taxpayer’s property for nonpayment. Accordingly, the IRS

expects to collect these payments primarily through deduction

from refunds.

Health Insurance Premium Assistance Tax CreditIndividuals or families who purchase insurance through the

exchange and whose income is below certain levels may apply

and qualify for the premium assistance tax credit. The credit is

refundable to the taxpayer or, alternatively, the credit may be paid

in advance directly to the insurer whereas the taxpayer would pay

the difference between the premium and the credit.

The credit is computed on a sliding scale for individuals and

families with household incomes between 100- and 400-percent

of the federal poverty level (FPL) for the family size. The credit

amount is based on the percentage of income the share of

premiums represents, rising from 2% of income for taxpayers at

100% of FPL, to 9.5% of income for those at 400% of FPL.

In some cases, taxpayers may owe additional tax if they are not

entitled to all or part of the advance payment of the credit. A

taxpayer who chooses to have advance credit payments sent

to their insurer will need to: (1) file a federal income tax return

(even if otherwise not required to do so) and (2) complete Form

8962, Premium Tax Credit (PTC) to reconcile the advance credit

payments with the PTC eligible to be claimed on the return. If the

amount is less than the actual PTC, the difference will result in a

higher refund or lower tax due. On the other hand, if the advance

credit payments that were paid to the health care provider were

more than the actual credit, the difference must be paid with the

taxpayer’s return.

Penalty Relief Related to Repayment of Excess Advanced Payments of the PTC for 2014Beginning with 2014 returns, similar to reconciling tax

withholdings with a taxpayer’s actual tax liability to determine

refunds or balances due, individuals benefiting from tax credits

for Marketplace coverage will follow the same process. Normally,

taxpayers may owe a penalty for late payments or underpayment

of estimated tax. For this first year of the ACA, however, the

IRS will waive these penalties (see Notice 2015-09) for eligible

taxpayers if it is due to repayment of excess advance payments of

the PTC. Penalties will not apply to underpayment of this shared

responsibility payment, but interest will accrue for late payments.

This relief does not extend the April 15, 2015 due date. If an

extension of time is requested, repayment of any excess advance

Death for dates on or after Exclusion Amount

Exclusion Amount Phased out at

April 1 2014 – April 1 2015 $2,062,500 $2,165,625

April 1 2015 – April 1 2016 $3,125,000 $3,281,250

April 1 2016 – April 1 2017 $4,187,500 $4,396,875

April 1 2017 – January 1, 2019 $5,250,000 $5,512,500

After January 1 , 2019 Equal to the federal exclusion Federal exemption plus 5%


TAXTLTETRTTTS

by Christina Immelman and Richard Barjon

Due to a sunset provision in 2011 state tax law, the Illinois Income

Tax rate for individuals, trust and estates has decreased from

5% to 3.75%effective January 1, 2015. The new rate applies to

Illinois taxable investment income, employee and unemployment

compensation, gambling and lottery winnings.

For corporations (excluding S corporations), the Illinois Income

Tax rate is decreasing from 7% to 5.25% effective January 1, 2015.

Additionally, corporations may use their Illinois net loss deduction

without limitation for tax years ending on or after December 31,

2014. This net loss deduction was limited to $100,000 for tax years

ending on or after December 31, 2012 and before December 31,

2014.

Corporate fiscal year filers must use one of two methods outlined

by the Illinois Department of Revenue to allocate their revenue

between the two rates and periods that overlap January 1, 2014.

We aren’t back to the pre- 2011 income tax rates yet, but we are

making progress. The personal income tax rate is scheduled to be

lowered to 3.25% in 2025 and the corporate rate is scheduled to fall

to the pre-2011 rate of 4.8%.

The replacement tax rates remain unchanged at 2.5% for

corporations and 1.5% for trusts, S corporations and partnerships.

Any not-for-profit entity with unrelated business income is subject

to the new rates as of January 1, 2015.

Please contact your WeiserMazars tax professional for more

information.

TAX

ILLINOIS TAx RATE CHANGEPublished on February 2, 2015

by Richard Bloom and Michael F. Rudegeair

Trustees and executors have the ability to make certain elections

on or before March 6, 2015 that could affect 2014 tax returns both

for the trusts and estates for which they are fiduciaries, as well as

the beneficiaries of those trusts and estates.

eLecTion To TreaT disTribuTions as Made in The prior TaX Year

A fiduciary of a trust or estate can elect to treat all or any part of a

distribution made within the first 65 days of any tax as having been

made on the last day of the previous tax year. The 65 day deadline

applicable to the 2014 tax year is Friday, March 6, 2015. As an

example, if a distribution is made on or before March 6, 2015, the

fiduciary can elect to treat any or all of the distribution as made in

the 2014 tax year.

In order to make an informed decision with respect to whether

or not to make this election, the fiduciary should compute the

trust’s 2014 fiduciary accounting income, distributable net income

and taxable income, and then determine the impact of additional

distributions on these three amounts and how the additional

distribution would impact the tax situation of the beneficiary.

As part of this analysis, the fiduciary must also consider the 3.8%

Additional Medicare Tax (which was new in 2013) as well as non–

tax factors such as the financial acumen of the beneficiary and the

grantor’s desire to distribute additional funds to the beneficiary.

For Example:The fiduciary determines that the trust has taxable income

subject to the 39.6% tax bracket after computing the trust’s

distributable net income and fiduciary accounting income.

TWO TIMELY ELECTIONS TRUSTEES ANd ExECUTORS SHOULd CONSIdER NOWPublished on February 20, 2015

NEW YORk CITY ANNOUNCES PROPOSAL TO REFORM THE CITY’S CORPORATE TAxby Matthew Dopkin

On January 12, 2015 Mayor de Blasio

announced a proposal to reform the City’s

corporate tax structure to bring consistency

with the changes that were passed in last

year’s New York State budget. The proposal,

which is intended to be revenue neutral,

would be retroactive to January 1, 2015.

On March 31, 2014, Governor Cuomo signed

the 2014-2015 budget which contained

dramatic changes to the state taxation of

corporations. (See our alert here.) Mayor de

Blasio’s proposal would incorporate many of

the state changes, including:

§ Merging the bank tax into the City’s

Corporate Franchise Tax.

§ A change to a single sales factor using

market-based sourcing for corporate

apportionment.

§ Adoption of an economic nexus standard.

§ Conformity with the State’s unitary

combined reporting rules.

§ Adoption of a new method of computing

net income by treating most income as

business income.

§ Targeted relief to small businesses and

manufacturers, including:

1. Excluding the first $10,000 of the

capital tax base.

2. A reduction of the tax rate for small

non-manufacturers with less than

$1 million in allocated net income

from 8.85% to 6.5%.

3. A reduction of the tax rate for small

manufacturers with less than $10

million in allocated net income

from 8.85% to 4.425%. A smaller

rate reduction will be provided

to manufacturers with income

between $10 million and $20

million.

The de Blasio administration feels these

changes will ensure corporations will not

need to maintain separate records

for City and State tax purposes, creating

consistency in taxation that will prevent

administrative burdens for both

taxpayers and the City, and moving the City

forward while protecting their long-term

fiscal health. The administration also views

the changes as reinforcing the City’s status

as the global center of commerce and

making the City more attractive for business

investment and job growth. The City is

planning to move their tax reform legislation

through the Governor’s executive budget that

is expected to be released in the upcoming

weeks.

Similar to the State changes, the City’s

proposal is geared toward corporate

taxpayers and did not address changes to the

City’s Unincorporated Business Tax.

The changes described above are only

some of the proposed tax law modifications.

Businesses should be aware of the changing

landscape in New York City and reach out to

their WeiserMazars professional for specific

guidance.

Published on January 15, 2015


TAXTLTETRTTTS

TAX

TANGIBLE PROPERTY REGULATIONS FOR SMALL TAxPAYERSby Stephen Brecher, Christina Immelman, Demetri Yatrakis and Donald Zief

Recently released Revenue Procedure 2015-20 contains a simplified procedure to implement the tangible property regulations for small

taxpayers.

Small taxpayers who choose to apply the tangible property regulations prospectively to amounts paid or incurred, and dispositions, in taxable

years beginning on or after January 1, 2014 have the option of making certain tangible property changes in their method of accounting on the

federal tax return without including Form 3115. Audit protection is not given to these taxpayers for taxable years beginning prior to January

1, 2014. Additionally, no “look-back” to obtain an additional tax deduction in 2014 is available.

A “small taxpayer” is one who has (i) total assets of less than $10 million as of the first day of the taxable year for which a change in method

of accounting is effective; or (ii) average annual gross receipts of $10 million or less for the prior three taxable years for each separate and

distinct trade or business.

Taxpayers that meet the scope requirements, who want to use this revenue procedure and have previously filed a federal tax return for 2014

with a Form 3115, may file an amended federal return before the return’s due date, including extensions, to withdraw the Form 3115.

Although qualifying for the relief provided by Rev. Proc. 2015-20 obviates the requirement to file a Form 3115, taxpayers should bear in mind

that, as noted above, electing to comply with Rev. Proc. 2015-20 prevents them from claiming a negative Section 481(a) adjustment for (i)

items capitalized

in past years that could have been deducted under the tangible property regulations, and (ii) dispositions in taxable years beginning before

January 1, 2014. In addition, in both of these instances, taxpayers do not receive audit protection for taxable years beginning prior to January

1, 2014. Taxpayers also cannot make use of the late partial disposition election available in 2014 to deduct the basis of duplicative assets

still on their books that are being depreciated. Consequently, qualifying taxpayers should carefully consider the pros and cons of choosing to

comply with the provisions of Rev. Proc. 2015-20.

Please contact your WeiserMazars tax professional for more information.

TAx PRACTICE BOARD sTephen brecher

[email protected]

TiMoThY burLeY

[email protected]

Published on February 24, 2015

The fiduciary also knows that the beneficiary of the trust is currently subject to the

15% tax bracket. Consequently, the fiduciary determines that it would be beneficial to

distribute additional funds from the trust to the beneficiary prior to March 6, 2015 and

elect to treat these distributions as having been made in 2014 in order to shift income

taxed in the 39.6% tax bracket to income taxed in the 15% tax bracket.

The election is made by checking the box next to Question 6 on page 2 of Form 1041 (U.S.

Income Tax Return for Estates and Trusts). If no return is required to be filed for the taxable

year of the trust for which the election is made, the election is made by filing a statement with

the Internal Revenue Service.

Fiduciaries must make note of any amounts elected under this rule for the 2013 tax year and

not treat them as current year (2014) distributions. Likewise, amounts elected this year cannot

be treated as distributions on next year’s tax returns.

eLecTion To TreaT cerTain paYMenTs of esTiMaTed TaX as paid bY The beneficiarY

A trustee may elect to treat any portion of a payment of estimated tax made by a trust as a

payment made by a beneficiary of the trust. This election may also be made by the executor

of an estate in a tax year that is reasonably expected to be the last tax year of the estate. This

election must be made on or before the 65th day after the close of the taxable year of the trust,

which is Friday, March 6, 2015 for 2014 estimated tax payments.

The election is made by filing Form 1041-T (Allocation of Estimated Tax Payments to

Beneficiaries). The election must be made (and the Form 1041-T filed) by March 6, 2015. The

Form 1041-T may be filed with the related fiduciary income tax return (Form 1041) if they are

both filed on or before March 6, 2015. Otherwise the Form 1041-T is filed separately with the

Internal Revenue Service Center where the Form 1041 will be filed.

The amount elected is treated as distributed to the beneficiary on the last day of the prior

taxable year (i.e., December 31, 2014 for amounts elected by March 6, 2015) and paid by the

beneficiary as an estimated payment on January 15 of the following year (i.e., January 15, 2015

for amounts elected by March 6, 2015). Amounts treated as distributions should be considered

by fiduciaries when considering the distributions election discussed above.

For Example:A trust made estimated tax payments during the first three quarters of a tax year. The

trust’s fiduciary then realizes that a beneficiary attained a certain age which triggered a

mandatory distribution. This mandatory distribution caused the trust’s taxable income

to be distributed to the beneficiary. Consequently, the trust is expected to owe little or no

tax, but the beneficiary would owe additional tax as a result of the distribution.

By making the election described above, the trust’s estimated tax payments could be

treated as made by the beneficiary.

Please contact your WeiserMazars tax professional for more information.

JeffreY kaTz

[email protected]

hoWard Landsberg

212.375.6604 or [email protected]

JaMes ToTo

[email protected]


NFP A L E R T S

NEW POLICY ON ExTENSIONS OF TIME TO FILE NYS ANNUAL REPORTSby Ethan Kahn

The Great news for New York State Exempt

Organizations! The New York State Charities

Bureau has stated that they have done away

with the formal written extension process

for filing the annual form CHAR 500. Exempt

Organizations will now enjoy an automatic

180 day extension from their statutory

deadline.

Prior to March 17, 2015 the Charities Bureau

allowed a request for either a 90 day or a 180

day extension and eliminated the need for

submitting the IRS form 8868. As of March

17, 2015 the Charities Bureau has eliminated

the entire written extension process and

requires the filing to be submitted within 180

days of the statutory deadline.

As an example, consider an organization

with a June 30th year end and the deadline

for filing their CHAR 500 on November

15th. There’s no longer a need to file for an

extension for 90 days to February 15th and

then another extension filing to May 15th as

the current law provides an ‘automatic 180

day extension’ stretching from November

15th to May 15th.

It is noteworthy to mention that if the

organization has filed for an extension

with the IRS, they should maintain those

documents for at least three years.

Our experts are ready and available to

answer any further questions you may have.

Click here to read the full announcement

from the STATE OF NEW YORK OFFICE OF

THE ATTORNEY GENERAL.

NOT-FOR-PROFIT

Published on March 24, 2015

TECHNICAL UPdATE: FASB ON THE MOvE by Denise Moritz

The Financial Accounting Standards Board

(FASB) at its March 4, 2015 Board meeting

approved the issuance of an Exposure Draft

of a Proposed Accounting Standards Update

(ASU), in the very near future, representing

significant changes in standards that

have applied to the not-for-profit industry

since 1993. At that time, the FASB issued

Statement of Financial Accounting Standards

No. 116, Accounting for Contributions

Received and Contributions Made, and

Statement of Financial Accounting Standards

No. 117, Financial Statements of Not-For-

Profit Organizations.

Since the issuance of these standards, both

accountants and not-for-profit organizations

have suggested changes to further improve

not-for-profit accounting. Some of these

have already been initiated to make not-

Published on March 24, 2015

for-profit financial statements more “user friendly” and understandable, both to those in the financial community and, more importantly, to

donors, Board members and other third parties.

The forthcoming proposed amendments to the existing standards are expected to include changes in: asset classification (Unrestricted vs

Restricted), financial performance, cash flows, and other areas that FASB believes will improve and enhance the utilization of the financial

statements. In addition, FASB is also suggesting changes within the statement of activities to help users to better understand “operating

results.” Certain items are being suggested to be reported separately from operations, such as a write-off of goodwill, equity transfers, and

acquisition and disposition of certain non-capitalized assets. Many of these changes will not only be reflected within the financial statements,

but also in accompanying footnotes, which will require more detailed explanatory information.

Given recent changes to Form 990, the tax information return filed annually by not-for-profit organizations, some have jokingly suggested

that we are moving toward a similar situation to the Form 10-K applicable to the commercial public market sector. Moreover, since not-for-

profits are “public” in spirit – not publicly owned, but publicly financed - why shouldn’t reporting be as transparent as possible?

The FASB proposal is due to be issued in mid-April, with an expected comment period through the end of July. FASB will not propose either

an expected effective date for adoption or implementation time frame, but will determine what the most appropriate effective date should

be based on the feedback received from constituents through comment letters, and through the deliberation process of the proposed ASU.

During this period, the industry will have the opportunity to consider the proposal, and determine if such changes will be operational and

sufficient to meet the needs of the industry. Will the changes add or remove value? Will they enhance transparency or add complexity? Will

the proposed standard achieve FASB’s mission to “establish and improve standards of financial accounting and reporting that foster financial

reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports?”

There is already an indication of dissatisfaction with the draft proposal among FASB members and certain other bodies within the accounting

profession, such as the American Institute of CPAs, as well as certain state CPA societies and other industry watchdogs. However, it is

premature to form a fair opinion. We patiently await the day that the Proposed ASU is exposed for comment; then the fun will begin -

feedback from constituents will be gathered for the Board to consider, and finally deliberations will start.

We will continue to keep you informed of the latest developments as this situation unfolds over the upcoming months.

scan The barcode beLoW To subscribe To The WeiserMazars Ledger!NOT-FOR-PROFIT GROUP MiTch LeWis

[email protected]

ron ries

212.375.6782 [email protected]

eThan kahn

[email protected]

hoWard cohen

[email protected]

aVi LazeroWiTz

[email protected]

WeiserMazars LLP is an independent member firm of Mazars Group.

A C C O U N T I N G | T A X | A D V I S O R Y

EVOLUTIONDEMANDS SPEEDAND FLEXIBILITY

DOLPHINS ARE SOME OF THE MOST SUCCESSFUL HUNTERS

IN THE ANIMAL KINGDOM. THEIR SPEED, INTELLIGENCE

AND ADAPTABILITY GIVE THEM A CRUCIAL EDGE.

WeiserMazars creates conditions that are exactly right.

We deliver the expertise, hands-on service and global

resources that help your company succeed in any business

environment. Our services help you identify and seize

opportunities, so that your company can thrive, no matter

what stage of the business lifecycle you’re in.

PLEASE CONTACT:

Victor Wahba / Chief Executive Off icer

646.402 .5799 / www.WMexact lyright .com

Victor.Wahba@WeiserMazars .com

WeiserMazars LLP is an independent member firm of Mazars Group. Exactly Right.

Date post:	19-Feb-2020
Category:	Documents
Upload:	others
View:	3 times
Download:	0 times

ledger - mazarsusa.com · • Need for a simplified rate approval process ... by The Economist...

Documents