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Accounting & Audit

The Building Blocks to a Useful Financial Statement Package

By Accounting & AuditNo Comments

Preparing a useful financial statement package is essential to your board of directors’ (“Board”) or finance committee’s ability to make informed business decisions. Although there are nuances specific to different organizations that may require additional metrics, there are general measures of performance that can be included in financial statement packages to help leaders make the most considerate decisions for their organization.

Although preparing basic financial statements for your Board or finance committee is helpful, the inclusion of different measures of performance can provide further visibility and context to the financial statements and the success of operations. In addition to presenting the financial statements for the period ended, consider adding the following items as part of your basic financial statement package for your next Board or committee meeting:

Comparison of Actual Amounts to Budgeted Amounts: Comparing the actual financial statement numbers to amounts expected or anticipated, and calculating the variance between them, can assist in assessing the results of operations as well as planning for the future. Consider if there is an advantage to showing the variance in terms of dollars, or percentages, or both!

Comparison of Actual Amounts to Prior Year Amounts: Comparing the actual financial statement numbers to the prior year, and calculating the variance between them, can show if your organization is performing in a similar manner to the past. If there are differences; are you able to explain why? Do they make sense? For income statement numbers, consider comparing the year-to-date amount to the prior year-to-date amount if preparing a mid-year report. This will help to predict if you’re on track to produce a similar net income or loss result.

Statement of Cash Flows: Understanding your organization’s cash inflows and outflows can help identify areas in which your organization can spend less and create excess cash. A cash flow statement explains where your organization is spending and receiving its money. By knowing this information, your organization can make decisions on how to finance its growth. For example, based on the cash activity, you can decide if your organization should tighten its collection policy on receivables and collect from customers more efficiently to generate more cash, or if your organization should obtain a loan.

Financial Statement Metrics: Calculating general financial statement metrics and comparing results to those of prior year or prior period can help to assess your organization’s financial health in simple numerical terms. Although there are numerous helpful metrics that can be calculated, below are three useful metrics:

  • Current Ratio: By dividing your organization’s current assets by its current liabilities, you can determine if your organization is able to cover its short-term liabilities using its current assets (i.e. cash, receivables, inventory, etc.)
  • Return on Assets: By dividing your net income figure by your average total assets, you can measure how much income is being generated on average by your assets.
  • Profit Margin: By dividing your net income by your net revenue amount, you can measure the percentage of each dollar of revenue that your organization keeps as earnings.

For assistance in preparing a financial statement package or for additional information, please feel free to contact Kristi Yanover, Audit Partner, at (858) 558-9200, or any member of our Accounting & Assurance Team, as we would be happy to assist you.

Whose Job is it Anyway? Evaluation of the Going Concern Assumption

By Accounting & AuditNo Comments

What is substantial doubt about an entity’s ability to continue as a going concern? Who is responsible for evaluating going concern? When is this evaluation required? What are the reporting requirements in regards to the preparation of financial statements in accordance with generally accepted accounting principle financial statements? The above questions are important to ask as the requirements to evaluate and report on substantial doubt about an entity’s ability to continue as a going concern have recently changed.

Evaluation of substantial doubt about an entity’s ability to continue as a going concern is the analysis of whether an entity is believed to be able to continue operations for a reasonable period of time, which is typically one year after the date financial statements are issued. Ordinarily, information that significantly contradicts the going concern assumption, or the entity’s ability to continue as a going concern, relates to the entity’s inability to continue to meet its obligations as they become due.

Accounting standard update 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern now requires management, not the independent auditor, of an entity to evaluate the entity’s ability to continue as a going concern and to disclose certain circumstances in the notes to the financial statements. Management should perform this evaluation at each annual and interim reporting period.

As management is responsible for the evaluation of whether there is substantial doubt about the entity’s ability to continue as a going concern, the following items should be considered when management identifies conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern:

  1. Management should consider whether its plans to alleviate the substantial doubt are effective. The plans should only be considered and disclosed in the financial statements if, within one year after the date the financial statements are issued, it is probable that the plans will:
    1. Be effectively implemented, and
    2. Mitigate or alleviate the conditions that give rise to the substantial doubt.
  2. Management should disclose the following items in the notes to the financial statements surrounding substantial doubt about the entity’s ability to continue as a going concern:
    1. Principal conditions or events that raised the substantial doubt,
    2. Management’s evaluation of the significance of those conditions, and
    3. Management’s plans that mitigated or alleviated the substantial doubt.
      1. If management’s plans do not mitigate or alleviate the substantial doubt, an express statement regarding substantial doubt of the entity’s ability to continue as a going concern must be disclosed in addition to other disclosures.

For all entities, ASU 2014-15 became effective for fiscal years beginning after December 15, 2016, and for annual period and interim periods thereafter.

For assistance in management’s evaluation of an entity’s ability to continue as a going concern, financial statement presentation, or additional information, please feel free to contact Kristi Yanover, Audit Partner, at (858) 558-9200, or any member of our Accounting & Assurance Team, as we would be happy to assist you.

Accounting for Long-Lived Assets, a Refresher

By Accounting & AuditNo Comments

Accounting principles generally accepted in the United States of America (U.S. GAAP) for long-lived assets are detailed in ASC 360, Property, Plant, and Equipment. Policies for recording cost, capitalization, assigning useful lives, and depreciation are summarized below.

Property, Plant, and Equipment should be reported at historical cost in accordance with FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises. The historical cost is the amount of cash or cash equivalents paid for an asset. Historical cost also includes any costs required to relocate and bring the asset to working condition (ASC 360-10). Examples of these costs include the initial cost to purchase the asset, sales tax, shipping, and installation costs.

Costs incurred to replace Property, Plant, and Equipment or to enhance the productivity of a long-lived asset should also be capitalized. Costs that are incurred during construction or acquisition of an asset which can be directly traced to preparing the asset for service should be capitalized. Costs that are not required to prepare an asset for use, such as regular maintenance, should be expensed as incurred.

While U.S. GAAP does not specifically permit the establishment of capitalization thresholds, many entities establish minimum cost thresholds to simplify recordkeeping. However, is it essential that the use of a threshold does not materially affect the financial statements.

According to the ASC Master Glossary, useful life is the period over which the asset is expected to contribute directly or indirectly to future cash flows. Factors to examine include the expected use of the asset by the entity, any legal or contractual time constraints, an entity’s historical experience with similar assets, and obsolescence or other economic factors (ASC 350-30-35-3). When estimating the useful life of an asset, entities should consider all relevant facts and circumstances.

Depreciation is meant to allocate the cost of an asset over the period it is in use by the reporting entity. ASC 360-10-35-4 explains that depreciation aims to distribute the cost of the asset less the salvage value, over the estimated useful life of the asset. U.S. GAAP recognizes several methods to depreciate assets which include straight-line, sum-of-the-years’-digits, declining-balance, and units-of-production methods. When selecting a method, consideration should be given to the cost of repairs and maintenance, whether productivity declines over time, and if the asset may become obsolete quickly.

For additional information on Long-Lived Assets or any other accounting or auditing matter, please feel free to contact Kristi Yanover, Audit Partner, at (858) 558-9200, or any member of our Accounting & Assurance Team, as we would be happy to assist you.

Modifications: Updated Guidelines on Share-based Payment Awards

By Accounting & AuditNo Comments

The Financial Accounting Standards Board has issued new guidelines, ASU 2017-09, regarding Compensation-Stock Compensation (Topic 718). The goal of the amendment is to clarify the terms and conditions surrounding share-based payment awards and help entities determine when to apply modification accounting.

Entities may alter the terms and conditions of a share-based payment award for a variety of reasons. The previous guidance under Topic 718 lead to diversity in practice due to the unspecific definition of modification. Until now, modification was defined as “a change in any of the terms and conditions of a share-based payment award.” This definition resulted in some entities applying modification accounting only when changes affected fair value, while others applied modification accounting for any change in award with the exception of solely administrative awards.

These differences in application will be reduced with the updated standard, which affects any entity that changes the terms or conditions of a share-based payment award. The amendment, effective December 15, 2017, provides entities with guidance on the changes to the terms or conditions of a share-based payment award that require the application of modification accounting. For example, a change in performance, market, or service condition would trigger use of modification accounting.

The effects of a modification should be accounted for unless all of the following conditions are met:

The fair value (or calculated/intrinsic value of an alternative measurement method is used) of the modified award is unchanged by the modification. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity does not have to estimate the value immediately before and after the modification.
The vesting conditions are unchanged by the modification.
The classification of the modified award as an equity instrument or a liability instrument is unchanged by the modification.
Note that the current disclosure requirements in Topic 718 apply regardless of whether an entity needs to apply modification accounting under the new amendment.

For assistance in implementing this accounting standard update or for additional information, please feel free to contact Kristi Yanover, Audit Partner, at (858) 558-9200, or any member of our Accounting & Assurance Team, as we would be happy to assist you.

Transition Time: Applying the New Lease Accounting Standard for Lessees

By Accounting & AuditNo Comments

New year, new lease standard! If you currently lease an asset, prepare to implement the new lease accounting guidance issued by the Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2016-02, Leases.

In order to minimize off-balance sheet reporting and enhance usefulness to financial statement users, the FASB issued ASU 2016-02, which namely updates lease accounting from the Lessee’s perspective. Accounting for leases from the Lessor’s perspective is largely unchanged, with the Lessor still required to categorize leases as either sales-type, direct financing, or operating.

Under current FASB guidance, leases from the Lessee’s perspective are categorized as operating or capital based on certain criteria. ASU 2016-02 now refers to leases as either operating or financing. Financing, previously capital, leases are treated in a similar manner to the previous guidance under ASU 2016-02.

With the new update, leases determined to be operating leases are recognized on the balance sheet as a right-of-use (“ROU”) asset and liability, unless the lease term is less than twelve months. The ROU asset and liability should be recorded at the present value of the remaining lease payments, with the ROU asset adjusted for initial direct costs, prepaid or accrued lease payments, and lease incentives received. Income statement and cash flow reporting remains substantially unchanged.

If you currently hold a lease classified under current guidance as operating, you will need to recognize the lease on the balance sheet at the earliest period presented using the modified retrospective approach unless the lease has been modified. There are numerous practical expedients available to assist in identifying and measuring leases. In summary, an adjustment will need to be made retrospectively to recognize and measure operating leases on the balance sheet.

In addition to the changes discussed above, ASU 2016-02 features updates to both sale-leaseback transactions and disclosure requirements.

For public entities, ASU 2016-02 becomes effective for fiscal years beginning after December 15, 2018. For all other entities, it becomes effective for fiscal years beginning after December 15, 2019. Early adoption is permitted.

For assistance in implementing the new lease accounting standard update or for additional information, please feel free to contact Kristi Yanover, Audit Partner, at (858) 558-9200, or any member of our Accounting & Assurance Team, as we would be happy to assist you.

Analyzing the Results of Budgets and Forecasts

By Accounting & AuditNo Comments

At the end of each year, it is important to both look back and see how well your organization performed against its budget and look forward to forecasting for the future. Budgets and forecasts are important tools to help you plan for your business’s future, and to gain insight into areas of improvement.

A budget is an important management tool used to analyze past operating results by detailing financial information of what an organization expects to happen over a period of time, typically a year. A budget will include details about your organization’s revenues, expenses, cash flows, and financial position. Most budgets are static and set for the organization’s fiscal year; however, some organizations use a continuous budget and adjust during the year based on changing business conditions. While this can add accuracy, it also requires closer attention and may not necessarily produce a better outcome.

With a budget, actual financial results are compared to budgeted amounts and the resulting variances are analyzed (actual minus budgeted equals variance). These variances help to identify specific areas for improvement within an organization. After determining your budget variances, you have generally two options to correct the gap: you can implement a flexible budget, which adjusts the budget in future periods to conform to revenue or spending realities; or, you can implement a static budget – keeping the budget the same but taking actions to impact future spending or revenue to bring future budgeted amounts and actual results more in line with each other.

A forecast is an estimate or projection of what will happen at a higher lever such as revenue and overall expenses. Forecasts can be prepared on both a short-term and a long-term basis, with a short-term forecast focusing on operational outcomes and a long-term forecast focusing on strategic business outcomes.

It is often advantageous to develop more than one forecast: a best-case scenario, a worst-case scenario, and a most-likely scenario. This will allow to plan for organizational growth while being able to adjust in instances when business doesn’t materialize or occurs slower than originally projected.

You can follow these easy steps in calculating a forecast:

  • Project Sales Revenue and Other Income – It is good practice to set sales or revenue targets first, then the remainder of your forecast will be based on this number. One good way to estimate revenue is by looking at last year’s financial results and use those to develop a reasonable goal for sales and profits plus or minus new or lost customers or contracts, etc.
  • Calculate Operating Expense – Estimating operating expenses includes fixed expenses such as rent or loan payments, as well as variable expenses such as utilities or supplies. A good starting point for estimating variable expenses is to average expenses in past years, and determine if they appear reasonable for the coming year, taking into account market increases, cost of living increases, and expected changes on the horizon for the business.
  • Calculate Cost of Sales – Direct costs of sales can be calculated by estimating your total amount of sales, and by estimating the total cost per unit of that sale. This generally includes the cost of inventory, or of services rendered.
  • Determine your Profit Margin – Profit margins are the result of the factors listed above: when you start with sales then subtract out operating expenses and cost of sales. This will give you a reasonable estimate of what your profit margin should be for the coming year(s).

Although budgeting and forecasting serve different purposes, a solid forecast assists with the development of a sound budget. For additional support or general questions about the process of preparing a budget or forecast, or setting one up in QuickBooks, feel free to contact Kristi Yanover, Audit Partner, at (858) 558-9200, or any member of our Accounting & Assurance Team; we would be happy to assist you.

The IRS reminds employers of the January 31st filing deadline

By Accounting & AuditNo Comments

Historically, employers have had to manage two filing deadlines for their Forms W-2, Forms W-3 (Wage and Tax Statements), and Forms 1099-MISC. The first deadline was January 31st, whereby these forms were due to the respective recipients. A second deadline of March 31st also had to be managed. This was when these forms were due to the Social Security Administration. Beginning in 2017, recipient copies and filing copies are both due January 31st, regardless of whether they are electronically filed or paper filed. It’s important to remember the new filing deadlines and ways to prepare yourself to ensure timely filing.

New Rules

Under the new Protecting Americans from Tax Hikes (PATH) Act of 2015, aimed at making it easier for the IRS to detect and prevent refund fraud and identity theft, the IRS accelerated the federal filing deadline to match the recipient copy deadline and allow for additional time to verify the legitimacy of returns.

The gap between the due dates has traditionally made it difficult for the IRS to match up Forms W-2 and 1099 with tax returns filed earlier in the season. This time lag has resulted in an increase in fraudulent returns filed, refunds issued to fraudulent persons, and identity theft of the taxpayer.

How You Can Prepare

How can you better prepare for issuing your Forms 1099 and W-2 when you don’t use a third-party service provider? It is best to get organized early.

Forms 1099

Maintain a vendor listing with each vendor’s current contact information. You are responsible for sending the recipient their Form 1099, so it is important that their address is current. The vendor listing should also include the vendor’s taxpayer identification number. As you begin a relationship with a vendor, have them complete Form W-9, Request for Taxpayer Identification Number, prior to payment. This will ensure you obtain proper reporting information prior to beginning your business relationship. Did you know this information can be collected and stored inside your company’s QuickBooks file for easy preparation and filing?

Double check and confirm the amounts paid with the vendors to ensure that the amounts to be reported on the forms are correct. Errors can easily be made when you use vendors that provide both services and products to your business.

Forms W-2 & W-3

As with your vendors, it is also important to have your employees’ correct mailing addresses and taxpayer identification numbers on file. Have your employees update a personal profile or complete a Form W-9. Compare the updated information to what you have in your system and implement any changes as noted.

Prior to preparing the tax forms, print a report detailing all of the payroll information, contact information, and taxpayer identification numbers and confirm its accuracy. If you note an error in a taxpayer identification number during this review process, you may need to file amended payroll reports.

Evaluate the number of W-2s you are issuing and determine whether paper filing or electronic filing is appropriate and/or required.

Understand the instructions for preparation of these forms. Form presentation and rules for reporting may have changed from previous years. It is important that you are aware of any changes early on so that you can prepare accordingly.

We Can Help

For additional information on your specific requirements or for assistance in preparing and filing the appropriate forms, please contact Kristi Yanover at Lindsay & Brownell, LLP.

Knowledge Center Individuals Closely Held Businesses Estates & Trusts Non-Profit Organizations International Accounting & Audit Useful Links IT Controls: How safe is your organization?

By Accounting & AuditNo Comments

We live in the time of technology, where further enhancements are created every day to make the business world a more effective and efficient place. With increased reliance on technology, many organizations highly depend on their IT department to ensure their systems are running smoothly and that controls are implemented to keep them safe. Because IT is highly specialized, many organizations do not know if the controls in place can actually protect them against a cyber attack, fraud, or identity theft. Will your IT controls protect your organization, or leave you exposed to theft or loss?

In the business world today, we have seen the decline in reliance on manual applications and an increase in reliance on technology. With higher reliance on technology, there is a higher risk for individuals to misuse the organization’s systems, exposing them to theft, error, and illegal exploits of confidential information. Utilizing technology is imperative; so how can your organization be progressive and technologically advanced while mitigating these risks? The answer is IT controls.

IT controls are essential in protecting assets, sensitive information, and financial data. They play a significant role in the areas of accounting and financial reporting as they have a direct impact on the overall reliability of the financial statements. The lack of IT controls may expose your organization to significant risk of financial loss.

In order to ensure the proper IT controls are implemented at your organization, you should first obtain a general understanding of your organization’s IT system. What type of computing environment does your organization use (LAN, web or cloud based system, etc.)? Also, understand which of these systems impact financial reporting and the safeguarding of assets.

Consider how your organization’s general IT controls achieve the following objectives:

  • The organization maintains reliable systems that include appropriate data backup and recovery processes.
  • Physical security and access to programs and data are appropriately controlled to prevent unauthorized use, disclosure, modification, damage, or loss of data.
  • Program changes (including report development) and systems acquisition and development are appropriately managed to ensure that the application software and reports adequately support internal controls and financial reporting.

After the proper controls are in place, your organization should define the objectives of their control structure through policy statements. This creates an organized direction for all employees and eliminates any disorientation or inefficiencies. Your organization should also monitor IT controls to ensure the controls are operating efficiently. Regular tracking of organization systems and network resources allows the organization to inspect and correct any irregularities that may happen. This can be performed by keeping a system log to track monitoring by the respective employees.

Lastly, it is important that your organization considers the need for an IT specialist. An IT specialist can help ensure the proper preventative maintenance is implemented (i.e. server backups, updating of antivirus software, examining firewall log files, installing Microsoft security updates, etc.).

If the proper IT controls are not in place, your organization will be subject to significant IT risks including phishing, malware and computer viruses.

For more information on implementing and monitoring IT controls, please feel free to contact a member of our Kristi Yanover at 858-558-9200.

IT Controls: How safe is your organization?

By Accounting & AuditNo Comments

We live in the time of technology, where further enhancements are created every day to make the business world a more effective and efficient place. With increased reliance on technology, many organizations highly depend on their IT department to ensure their systems are running smoothly and that controls are implemented to keep them safe. Because IT is highly specialized, many organizations do not know if the controls in place can actually protect them against a cyber attack, fraud, or identity theft. Will your IT controls protect your organization, or leave you exposed to theft or loss?

In the business world today, we have seen the decline in reliance on manual applications and an increase in reliance on technology. With higher reliance on technology, there is a higher risk for individuals to misuse the organization’s systems, exposing them to theft, error, and illegal exploits of confidential information. Utilizing technology is imperative; so how can your organization be progressive and technologically advanced while mitigating these risks? The answer is IT controls.

IT controls are essential in protecting assets, sensitive information, and financial data. They play a significant role in the areas of accounting and financial reporting as they have a direct impact on the overall reliability of the financial statements. The lack of IT controls may expose your organization to significant risk of financial loss.

In order to ensure the proper IT controls are implemented at your organization, you should first obtain a general understanding of your organization’s IT system. What type of computing environment does your organization use (LAN, web or cloud based system, etc.)? Also, understand which of these systems impact financial reporting and the safeguarding of assets.

Consider how your organization’s general IT controls achieve the following objectives:

  • The organization maintains reliable systems that include appropriate data backup and recovery processes.
  • Physical security and access to programs and data are appropriately controlled to prevent unauthorized use, disclosure, modification, damage, or loss of data.
  • Program changes (including report development) and systems acquisition and development are appropriately managed to ensure that the application software and reports adequately support internal controls and financial reporting.

After the proper controls are in place, your organization should define the objectives of their control structure through policy statements. This creates an organized direction for all employees and eliminates any disorientation or inefficiencies. Your organization should also monitor IT controls to ensure the controls are operating efficiently. Regular tracking of organization systems and network resources allows the organization to inspect and correct any irregularities that may happen. This can be performed by keeping a system log to track monitoring by the respective employees.

Lastly, it is important that your organization considers the need for an IT specialist. An IT specialist can help ensure the proper preventative maintenance is implemented (i.e. server backups, updating of antivirus software, examining firewall log files, installing Microsoft security updates, etc.).

If the proper IT controls are not in place, your organization will be subject to significant IT risks including phishing, malware and computer viruses.

For more information on implementing and monitoring IT controls, please feel free to contact a member of our Kristi Yanover at 858-558-9200.

Internal Control Monitoring – Are You In Control?

By Accounting & AuditNo Comments

Are your internal controls functioning properly? Help your organization achieve its goals by implementing a system to monitor your internal controls and measure their effectiveness.

Implementing an internal control system designed around your organization’s specific risks is a necessity for any organization. Internal controls must be properly designed and implemented to be useful in achieving your organization’s strategic, operating, compliance, and reporting objectives. Internal controls allow an organization’s management piece of mind knowing everything is operating properly without having to oversee every facet of the organization.

Monitoring internal controls is essential to ensure controls are operating efficiently. Monitoring involves the use of evaluations by management and third-parties of the controls in place to identify issues and communicate these issues to the appropriate parties for corrective action to be taken. Implementing a competent monitoring system can be incredibly cost-effective to your organization in resolving issues timely and efficiently.

Your organization’s monitoring system may consist of ongoing activities, separate evaluations, or a combination of the two; all of which are focused on your organization’s identified risks. Management should emphasize a general ethical environment through daily actions and behavior, and setting “the tone at the top” as it is more commonly referred to, can help to ensure that the assessment procedures in place are being followed with diligence. Setting a schedule for daily, weekly, and monthly monitoring techniques is imperative. Management must also hold its team accountable for understanding issues identified and a timeline for corrective improvements. Below are some internal control monitoring procedures that can be tailored to your organization:

  • Implement independent verifications, such as reconciliations, by personnel of different levels on a timely basis.
  • Perform walkthroughs of your transaction recording processes to verify all required steps are taken.
  • Schedule an internal audit.
  • Use bench marking to compare your report results to similar departments, companies, or industries.
  • Consult information technology specialists regularly to learn about security setting updates and current technology and cyber security risks.
  • Learn your software; many applications, such as Quick Books, have security settings that may be beneficial in safeguarding confidential information.

For more information on implementing and monitoring internal controls, please feel free to contact a member of our Accounting and Assurance team at 858-558-9200.

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