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Weekly National News

September 22, 2017

Painful Side Effects of New Accounting Standards

(BNA) September 14, 2017 – The Financial Accounting Standards Board issued ASU 2014-09 Revenue from Contracts with Customers declaring that the new standard would remove inconsistencies in revenue requirements, improve comparability of revenue, provide more useful information through improved disclosure requirements, and simplify the preparation of financial statements. You get the picture - all these wonderful benefits. It is only during implementation do the side effects become fully apparent. Most public companies are set to adopt the rules next year, however, many are only now realizing the numerous implementation issues.
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Big Four Increasingly Competing with Law Firms

(Accounting Today) September 14, 2017 – The Big Four accounting firms are moving more into the legal services market, competing with law firms on their traditional turf, according to a new report. The report, from ALM Intelligence, found that 69 percent of the leaders of law firms who were surveyed reported the legal arms of the Big Four as a major threat. Big Four firms, including Deloitte, PwC, KPMG and EY, average 2,200 lawyers in 72 countries, putting them on a level of the major law firms such as Jones Day, CMS and Clifford Chance.
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Remote Sales Tax Collection Looks to be Heading to SCOTUS

(Don’t Mess With Taxes) By Kay Bell, September 17, 2017 – Many of those tempting catalogs starting to roll in for holiday shopping still include an insert form you can use to order the very old-fashioned snail mail way. Most, however, tout the benefits of ordering their items by phone or online. Regardless of how the transaction is completed, there's the issue of added sales tax. While Amazon now collects sales taxes on items it ships to all 50 states, that's not the case with other remote sellers. But it could soon be.
readmore

 

CBO: ObamaCare Uncertainty Will Lead to 15 Percent Hike in Premiums

(The Hill) September 14, 2017 – Premiums for ObamaCare's benchmark silver plans will increase by an average of 15 percent in 2018, the Congressional Budget Office (CBO) estimated in a new report released Sept. 14. CBO blamed the premium hikes on "short-term market uncertainty." Insurers have pleaded for more certainty on key ObamaCare payments called cost-sharing reduction subsidies, which reimburse them for giving discounts to low-income patients. The Trump administration has made the payments on a month-to-month basis, but insurers want them funded on a long-term basis.
readmore

 

Social Security COLA Could Get Wiped Out by Medicare Costs

(Investment News) September 15, 2017 – Consider this perverse scenario. Next year, typical retirees could see their expected Social Security cost-of-living adjustment for 2018 virtually wiped out by a big jump in Medicare premiums, but premiums for many higher-income clients could remain the same as 2017. Blame this potentially bizarre situation on the "hold harmless" provision that is designed to protect most retirees from a net decline in Social Security benefits from one year to the next.
readmore

 

Advisors Warned: Wake Up to Seismic Industry Changes

(Financial Planning) September 13, 2017 – Although technological innovation and demographic shifts are changing how financial advice is consumed and compensated, top executives say many advisors are ignoring these trends to their peril. “Advisors have to wake up from their coma,” United Capital CEO Joe Duran told the audience at the Disrupt Advice conference.
readmore

 

What a Tax Professional Would Like to See Out of Tax Reform

(Forbes) By Kelly Phillips Erb, September 14, 2017 – In Tom Clancy’s Executive Orders, there’s a scene where the Secretary of the Treasury designate puts the entire Tax Code on a desk, and the desk collapses. That’s an apocryphal image, but it does represent what’s happened with the United States’ tax system today. It’s far, far too complex for the average American to understand.
readmore

 

Half Say Revenue Rule Is Immaterial, One-Fifth Still Evaluating

(Compliance Week) September 15, 2017 – Mid-year disclosures by Fortune 500 filers show roughly half of those companies expect the pending new revenue recognition accounting standard to have an immaterial effect on their financial positions, but nearly 20 percent are still evaluating the situation. PwC studied July through mid-August disclosures required by the Securities and Exchange Commission under Staff Accounting Bulletin No. 74 regarding pending accounting standards to gauge the overall impact of major new changes that are on the horizon.
readmore

 

FASB Takes Step to Further Simplify Hedge Accounting Rules

(AccountingWEB) September 18, 2017 – The Financial Accounting Standards Board has issued a final standards update intended to improve and simplify hedge accounting rules. The new standard expands hedge accounting for financial and commodity risks, according to the FASB. It allows more transparency for the presentation of economic results in the body of financial statements and in footnotes. The update takes effect for fiscal years (and interim periods within those fiscal years) beginning after Dec. 15 for public companies, and for fiscal years beginning after Dec. 15, 2019 (and interim periods for fiscal years beginning after Dec. 15, 2020) for private companies. Early adoption is permitted in any interim period or fiscal years before the effective date of the standard.
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Auditors May Have to Keep Artificial Intelligence from Cooking the Books

(Going Concern) By Megan Lewczyk, September 18, 2017 – Some smart people are starting to contemplate how to keep artificial intelligence safe and in-check. It’s a fascinating topic, especially after Facebook had to shut down their AI chatbot after it started to develop its own language in August. Plus, I have a feeling it’s going to trickle into the scope of work for an audit team through Sarbanes-Oxley and internal control testing. Here’s why.
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Painful Side Effects of New Accounting Standards

(BNA) September 14, 2017 – Drug commercials all follow a predictable routine - after extolling the benefits of the drug, a soft voice adds what we refer to as the “fine print” that the side effects may include headache, nausea, upset stomach, death, etc. They are words we don’t like to hear, but honesty requires that we be aware of the fine print. Unfortunately, new accounting standards arrive without the “fine print.” New standards do not disclose the potential side effects of implementation.

The Financial Accounting Standards Board (FASB) issued ASU 2014-09 Revenue from Contracts with Customers declaring that the new standard would remove inconsistencies in revenue requirements, improve comparability of revenue, provide more useful information through improved disclosure requirements, and simplify the preparation of financial statements. You get the picture—all these wonderful benefits. It is only during implementation do the side effects become fully apparent. Most public companies are set to adopt the rules next year, however, many are only now realizing the numerous implementation issues. 

“Most of the people today are struggling with readiness. A lot of people were not fast enough to get ready to adopt.” Jagan Reddy, senior vice president at Zuora Inc., told Bloomberg BNA staff correspondent Denise Lugo, when asked about the slow pace of implementation. “Another reason is companies want similar companies…to adopt first so they can use them as a guide.”

The FASB did provide some relief by creating a Transitional Resource Group (TRG) to provide additional guidance with implementation. The FASB also delayed implementation of ASU 2014-09 for one year. But, for some entities this was not enough. Starbucks Corp., Oracle Corp., Apple Inc., each disclosed in recent quarterly reports, that they won't adopt the new revenue recognition rules until 2019. 

The same scenario is playing out with companies implementing ASU 2016-13 Measurement of Credit Losses on Financial Instruments. The benefits the FASB expect to be created with this standard include providing financial statement users with more useful information about expected credit losses. Even though the deadline for implementation is a full year later than the revenue recognition standard, companies should already be well into their preparation. The FASB vigorously stressed this point at a recent American Institute of CPAs banking conference. “The clock is ticking,” Shayne Kuhaneck, FASB assistant director of technical activities, warned at the conference.

Difficult implementation is nothing new. FAS 96 Accounting for Income Taxes created the perfect storm of implementation issues. It was originally issued to supersede Accounting Principles Board Opinion No. 11 Accounting for Income Taxes with an effective date of Dec. 15, 1988.

The FASB subsequently issued FAS 100 Accounting for Income Taxes extending the effective date an additional year to Dec. 15, 1989, in order to provide preparers and auditors more time to study, understand, and apply the provisions of FAS 96. It soon became apparent, however more time was needed. Many began to feel the guidance was too complex and difficult to understand.

Along came FAS 103 Accounting for Income Taxes which extended the effective date two additional years to Dec. 15, 1991. Altogether, the three additional years were expected to provide the time for everyone to fully comprehend the requirements of FAS 96 and provide the FASB time to consider requests by preparers to amend certain provisions. But, once again more, additional time was needed.

Next FAS 108 Accounting for Income Taxes extended the effective date to Dec. 15, 1992, four years later than the original effective date of FAS 96. The “fine print” had proven to be a pill too hard to swallow. FAS 96 was simply too difficult and controversial and soon it was superseded by FAS 109 Accounting for Income Taxes in order to reduce its complexity.

As seen by the complications with FAS 96, no one can predict the problems that will be encountered when a new standard is issued. It may be best for entities to expect the unexpected and start early to identify all areas where the entity may be affected by the standard, particularly taking advantage of all the guidance provided by the standard setter. Remember that with a new accounting standard there is no fine print or soft voice to provide warnings.

 

 

 

 

Big Four Increasingly Competing with Law Firms

(Accounting Today) September 14, 2017 – The Big Four accounting firms are moving more into the legal services market, competing with law firms on their traditional turf, according to a new report.

The report, from ALM Intelligence, found that 69 percent of the leaders of law firms who were surveyed reported the legal arms of the Big Four as a major threat. Big Four firms, including Deloitte, PwC, KPMG and EY, average 2,200 lawyers in 72 countries, putting them on a level of the major law firms such as Jones Day, CMS and Clifford Chance.

Emerging markets have been a key part of the Big Four firms’ expansion in the legal services area. The report found 76 percent of their lateral hires in the legal industry since the start of 2016 have occurred in Asia and Latin America. The Big Four firms have been rebuilding their legal services businesses after retrenching in the wake of the Sarbanes-Oxley Act of 2002.

“What we’re seeing is indeed a big expansion by the Big Four into legal services,” said Nicholas Bruch, a senior analyst at ALM Intelligence. “In some areas that is a natural evolution of their existing business lines in audit work, tax, advisory or consulting. That’s obvious in places where the Big Four are providing legal services related to tax. It makes a lot of sense to begin packaging lawyers in with their tax advisors or their auditors. That’s something the Big Four have been doing for a long time, and it’s something that we’re seeing organic growth in.”

The report also found growth in areas such as labor and employment-related legal services. “The Big Four have fairly well-developed services in areas related to labor and employment,” said Bruch. “They have large consulting arms. They have large immigration consulting teams, and they’ve bridged off of those strengths to provide legal services, which is a natural evolution of their existing business lines. The Big Four have particularly strong immigration teams, and are competing at the highest level with many of the labor and employment law firms, which have traditionally owned those markets.”

The report also found growth in legal services related to mergers and acquisitions from the Big Four.

“This is something that law firms are viewing as a major threat,” said Bruch. “M&A is a bread and butter service for law firms, one in which they make a fair amount of profit and revenue. The more worrying thing for law firms is they see a unique selling point in the Big Four. The Big Four are offering a sort of complete package, a merger in a box.”

Big Four firms will offer to do the advisory work upfront to identify the merger candidate and then bring in the tax professionals, along with the lawyers to do the due diligence to set up the deal, according to Bruch. They will then transact the deal, perhaps with the help of outside financial services companies, as well as do the post-merger entity cleanup typically performed by lawyers, along with the post-entity financial cleanup, traditionally performed by the accountants. They will then do the post-merger integration, which is usually done by the consultants.

“They’ll package it all into one, and that is a pretty compelling offer to CFOs, who like the idea of having one service provider who hopefully is giving them a slightly cheaper rate for these services because they’re getting all of the work,” said Bruch. “And we are seeing that kind of aggressive pricing by the Big Four. But more importantly it’s also more attractive for the CEO or business line leader. Instead of arranging with 15 or 16 different vendors, they can go to one partner who’s going to own the whole relationship and manage everything behind the scenes. That’s a very attractive deal, particularly in areas where it’s a run of the mill merger, under $500 million.”

The report didn't focus on smaller accounting firms, but it found particular growth in legal services for the Big Four outside the United States, where firms don't face restrictions from Sarbanes-Oxley. "This is the elephant in the room for the Big Four," said Bruch. "This is a global game in the legal market. The regulatory situation varies from country to country and region to region. You have situation in the United States where Sarbanes-Oxley looms large. Many lawyers thought Sarbanes-Oxley kicked the Big Four out of the legal market. That is wrong. In reality, what happened is the Big Four were kicked out of a certain range of services to their audit clients. That's an important distinction."

 

 

 

 

 

Remote Sales Tax Collection Looks to be Heading to SCOTUS

(Don’t Mess With Taxes) By Kay Bell, September 17, 2017 – I'm not a big shopper in real life. But drop a catalog in my lap and I can find a dozen things I'd love to buy. In fact, I'm checking my porch multiple times a day for a lamp I recently ordered.

Many of those tempting catalogs still include an insert form you can use to order the very old-fashioned snail mail way. Most, however, tout the benefits of ordering their items by phone or online.

Regardless of how the transaction is completed, there's the issue of added sales tax.

While Amazon now collects sales taxes on items it ships to all 50 states, that's not the case with other remote sellers.

But it could soon be.

Looking to lose: On Sept. 14, the South Dakota Supreme Court ruled that the state cannot force out-of-state retailers to collect sales tax. It was a quick decision, coming just two weeks after oral arguments in the case involving internet retailers Wayfair Inc., Overstock and Newegg.

And that was just what state officials wanted.

In that state high court hearing, South Dakota's attorneys conceded that the state's 2016 law expanding nexus to allow for tax collection on remote sales is unconstitutional under the standard established by the Supreme Court of the U.S. (SCOTUS) in its 1992 Quill Corp. v. North Dakota ruling.

The South Dakota justices affirmed that position:

“However persuasive the State's arguments on the merits of revisiting the issue, Quill has not been overruled. Quill remains the controlling precedent on the issue of Commerce Clause limitations on interstate collection of sales and use taxes. We are mindful of the Supreme Court's directive to follow its precedent when it ‘has direct application in a case’ and to leave to that Court "the prerogative of overruling its own decisions."

Giving the U.S. Supreme Court the chance to revisit — and overturn — Quill is exactly what South Dakota and other supporters of broader nexus rules want.

If the nation's highest court does take the case, the justices' decision will once again have national implications.

The U.S. Supreme Court refused earlier this year to hear Colorado's tattle-tale sales tax. It took effect July 1. Since that decision other states have followed Colorado's sales tax reporting/collection model.

Probable, but not assured, review: Most legal eagles think the U.S. Supreme Court will take the South Dakota case.

At least once member of that esteemed group, Justice Anthony Kennedy, has expressed interest in taking a case to challenge Quill. In the Supreme Court's March 2015 decision in Direct Marketing Association v. Brohl, Kennedy wrote:

“In Quill, the Court should have taken the opportunity to reevaluate Bellas Hess not only in light of Complete Aut but also in view of the dramatic technological and social changes that had taken place in our increasingly interconnected economy. There is a powerful case to be made that a retailer doing extensive business within a State has a sufficiently ‘substantial nexus’ to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet. After all, ‘interstate commerce may be required to pay its fair share of state taxes.’”

A handful of others, however, think that the Mount Rushmore State's rushed strategy has created a case that is not developed enough for review before the U.S. Supreme Court.

And others in legal and public policy sectors argue that it's the legislative, not juridical, branch of our government that should be taking the lead here. They argue that it's Congress' job, not the Supreme Court's, to decide this (and other) tax matters.

That, however, hasn't happened, although it's not for lack of trying.

Congress has for years been fiddling with proposals to establish a nationwide system that allows states to collect sales taxes from remote sellers, but still hasn't been able to agree on an approach.

If SCOTUS does take the Wayfair/South Dakota case and rules for the state, it could alleviate some pressure on Capitol Hill to get involved.

If, however, the court decides to uphold Quill, either by a new ruling or implicitly by not taking the case, that will put more pressure on the House and Senate to act in this area.

 

 

 

 

 

CBO: ObamaCare Uncertainty Will Lead to 15 Percent Hike in Premiums

(The Hill) September 14, 2017 – Premiums for ObamaCare's benchmark silver plans will increase by an average of 15 percent in 2018, the Congressional Budget Office (CBO) estimated in a new report released Sept. 14.

CBO blamed the premium hikes on "short-term market uncertainty."

Insurers have pleaded for more certainty on key ObamaCare payments called cost-sharing reduction subsidies, which reimburse them for giving discounts to low-income patients.

The Trump administration has made the payments on a month-to-month basis, but insurers want them funded on a long-term basis.

The Senate's Health Committee is working on a bipartisan bill that would fund the payments at least through 2018, but it's unclear if a deal can be reached between Democrats and Republicans.

They're working on a short timeline, however.

Insurers must sign contracts by Sept. 27 to be able to participate in the ObamaCare markets next year.

Also contributing to higher premiums in 2018, CBO said, is a higher percentage of the population living in areas with only one ObamaCare insurer.

Several insurers have said they won't participate in the markets next year, leaving many counties with only one insurer.

Uncertainty in the market will likely be resolved by 2019, CBO said, with premiums expected to be lower.

The CBO also estimated that enrollment will increase from 10 million this year to 11 million next year.

That growth is limited, however, because of premium increases, the Trump administration's cuts in ObamaCare advertising and outreach funding, and a shorter enrollment period, CBO said.

 

 

 

 

 

Social Security COLA Could Get Wiped Out by Medicare Costs

(Investment News) September 15, 2017 – Consider this perverse scenario. Next year, typical retirees could see their expected Social Security cost-of-living adjustment for 2018 virtually wiped out by a big jump in Medicare premiums, but premiums for many higher-income clients could remain the same as 2017.

Blame this potentially bizarre situation on the "hold harmless" provision that is designed to protect most retirees from a net decline in Social Security benefits from one year to the next.

Although it is still more than a month away from the official 2018 COLA announcement, the latest Consumer Price Index (CPI) for August suggests that Social Security benefits could increase by about 1.8% next year, according to Mary Johnson, senior policy analyst at The Senior Citizens League, an advocacy group for older Americans.

COLAs are based on increases in the CPI-W, which measures price inflation for urban workers, from the third quarter of the prior year to the corresponding third quarter of the current year. The Social Security Administration will make its official announcement about next year's COLA in October.

"With the anticipated higher oil prices over the next few weeks (due to disruptions caused by Hurricanes Harvey and Irma), it could well go higher," said Ms. Johnson. The anticipated 1.8% increase would be a substantial boost over this year's paltry 0.3% COLA, which followed no increase in benefits in 2016, and would make it the largest COLA since 2012 when benefits rose by 1.7%.

HOLD HARMLESS PROVISION

Most seniors have their monthly Medicare part B premiums deducted directly from their Social Security benefits. The hold harmless provision prevents the annual increase in their Medicare premiums from exceeding the dollar amount of the increase in their Social Security benefits. It protects about 70% of Medicare enrollees.

The remaining 30% of Medicare enrollees are not protected by the hold harmless provision. They include people who are not collecting Social Security benefits because they are not eligible, such as some public-sector employees, or because they want to delay benefits until they are worth more at an older age. New enrollees in Medicare are also not covered by the hold harmless provision.

In addition, high-income seniors, defined as individuals with a modified adjusted gross income over $85,000 or married couples with joint incomes over $170,000, are not protected by the hold harmless provision. MAGI includes adjusted gross income plus tax-exempt interest. Medicare premiums for 2018 will be based on 2016 tax returns.

IMPACT ON PREMIUMS

Most people who enrolled in Medicare before 2016 paid about $104 per month for Medicare Part B premiums which covers doctors' fees and an outpatient services. Because there was no Social Security COLA in 2016, there was no increase in their Medicare Part B premiums.

In 2017, Social Security benefits increased 0.3%, boosting the average benefit by about $5 per month and capping Medicare Part B premiums for protected beneficiaries at about $109 per month. In contrast, new enrollees in 2017 pay the new standard Medicare Part B premium of $134 per month.

This year, high-income retirees pay the standard monthly premiums of $134 per month plus a monthly surcharge ranging from $53.50 to $294.60 per person. Surcharges of up to $76 per month also apply to Medicare Part D prescription drug plans.

The 2017 Medicare trustees report projects Medicare Part B premiums will remain at $134 per month next year. An official announcement about Medicare premiums for 2018 will be made this fall.

If the Trustees projections are correct, people who are already paying $134 per month, and many high-income retirees who pay a monthly surcharge, would continue to pay the same Medicare Part B premium next year. However, the highest-income retirees could pay even more due to new income tiers that take effect in 2018.

"Anyone whose Medicare premiums were adjusted in the past due to the hold harmless provision aren't likely to see any of their COLA increase as Medicare premiums rise to the current $134 per month," said Ms. Johnson.

Consider this example. For a retiree receiving $2,000 per month in Social Security benefits in 2017, a 1.8% COLA would boost benefits by $36 per month in 2018. If that retiree were paying $109 per month for Medicare part B in 2017, that $36 increase in benefits would fully support a $25 per month hike in Medicare Part B premiums to $134 per month without violating the hold harmless provision. But if someone's Social Security benefit increased by just $20 per month, their monthly Medicare premium hike for 2018 could not exceed $20.

To be covered by the hold harmless provision in 2018, you must have your Medicare Part B premiums deducted from your Social Security benefits beginning no later than November 2017 and continuing through at least January 2018. In addition, you must not be currently paying a high-income surcharge.

 

 

 

 

 

Advisors Warned: Wake Up to Seismic Industry Changes

(Financial Planning) September 13, 2017 – Although technological innovation and demographic shifts are changing how financial advice is consumed and compensated, top executives say many advisors are ignoring these trends to their peril.

“Advisors have to wake up from their coma,” United Capital CEO Joe Duran told the audience at the Disrupt Advice conference.

Duran says his biggest concern is that most advisors aren’t acknowledging seismic shifts in planning: In the past four years, he notes, Vanguard has consumed $900 billion in ETF inflows alone, while its digital advice platform nears $100 billion in AUM.

“They have eviscerated the wealth management industry,” he says. “They can charge 30 basis points for advice, because they are making money on the products.”

Additionally, Duran says many advisors are oblivious to the real value their clients see in their service, which is financial planning, not investment performance.

“The obstacle is in their heads,” he says. “Clients want you to open up and talk about what they care about. Not about the beta of their portfolio. They want to talk about what matters.”

SHOW OF HANDS

The next generation of advisors is already looking to do things differently, says XY Planning Network co-founder Alan Moore, who asked for a show of hands from all the advisors in the room if they would be happy making $100,000 a year. No hands went up.

“A lot of young planners would be thrilled to make $100,000 — want just to serve a group of clients they really love and work 40 hours a week,” he says, noting that the figure he mentioned was still two-and-a-half times the median American salary. “The reality is they don’t want to make as much money as you did.”

Additionally, Moore sees RIA practices heading toward niches, rather than a generalized approach.

“Vanguard is going to be the Bud Lite of financial planning,” he says. “We get to be the craft beers of the industry. I don’t need a million clients like Vanguard. We can’t be all things to all people. We tried to do that for so long and we’re going to move past that now.”

Of course, change is easier said than done, notes David Canter, head of Fidelity’s RIA business, which today officially launched its digital wealth advice platform, Fidelity AMP.

Canter recalls working with a very traditional Boston firm staffed by numerous CFAs who made their careers on portfolio analysis and recommendations.

“It’s hard to change from being investment focused to holistic planning,” Canter says. “They weren’t changing who their clients were, just how they are engaged. And they were afraid about how to engage.”

Canter advises firms emphasize their “unfair advantage,” to remain competitive, which he terms “something you can do that can’t be replicated by computer.”

‘NOW FLIPPED’

The industry has seen values change, notes Don Plaus, head of Merrill Lynch’s private banking and investment group.

“Twenty-seven years ago, wealth management was very narrowly focused. Now it has expanded out greatly,” Plaus says. “At that time you got paid for the transaction, and advice was free. That’s now flipped.”

“The bottom line is our clients are demanding more from our advisors,” he says, adding that Merrill has adopted a team approach to financial planning.

There have been eureka moments, he says. “Understanding the intent of wealth is important.”

Duran says advisors will also need to understand which client they want to serve.

“Not everyone can drive a Mercedes,” he says. “Who are you built for?” He says his firm has decided to help people at higher income levels because they can afford to make choices about the help they receive: “It’s too expensive to serve someone who does not have a lot of choices.”

But many wealth management firms will undoubtedly have to broaden their service scope, Canter says.

“The big are getting bigger,” Canter says. “Volume is going to matter.”

 

 

 

 

 

What a Tax Professional Would Like to See Out of Tax Reform

(Forbes) By Kelly Phillips Erb, September 14, 2017 – In Tom Clancy’s Executive Orders, there’s a scene where the Secretary of the Treasury designate puts the entire Tax Code on a desk, and the desk collapses. That’s an apocryphal image, but it does represent what’s happened with the United States’ tax system today. It’s far, far too complex for the average American to understand.

The complexity in the Tax Code leads to lesser compliance with the law. For example, take gambling. Amateur gamblers are supposed to separate out their winning sessions from their losing sessions; winning sessions are noted as part of “Other Income” while losing sessions (up to the amount of your gambling winning sessions) are included as an Itemized Deduction. Most gamblers simply ignore this on their taxes (unless they receive a W-2G). If gamblers could simply note their net win on their tax return, they’d be far more likely to include their gambling winnings on their returns.

A simpler Tax Code would also lower compliance costs for Americans. Today, many of my clients are people who shouldn’t need a tax professional—people who we think of as average Americans with typical lives. These clients tell me that the complexity has driven them to a professional. As I tell my friends, I have lifetime employment.

Additionally, there’s no reason for favoritism in the Tax Code. Thanks to lobbyists, the Tax Code is littered with examples such as real estate. Mortgage interest and property tax are tax deductible (itemized deductions) for homeowners; rent is not. The same favoritism is present in business taxes, too. The Domestic Production Activities Deduction is for manufacturers of tangible products. Thanks to lobbyists, software, an intangible good, is eligible for this tax break. The real estate and software industries have excellent lobbyists.

A simpler Tax Code would be easier for the IRS to administer, lessen compliance costs for both individuals and businesses, and would almost certainly lead to increased tax collections at the same tax rate. Unfortunately, what I’ve seen in the initial proposal from President Trump is a lowering of rates without changing the Tax Code.

There is no doubt that if tax rates decrease, taxpayers will pay less. In that sense, President Trump’s plan is a win for the average American. But why not aim higher? Why not put the current Tax Code in the shredder and make something that’s simple and straightforward? We could both lower tax rates and keep it revenue neutral.

The reality is that Congress benefits from the complexity. Lobbyists spend their largesse on Congress, and our Congressional representatives are the beneficiaries. Maybe Congress will surprise me. Being cynical, I doubt this will change.

I’d love to be surprised out of what emerges from Congress (if anything). I suspect, however, that my cynicism is well placed.

 

 

 

 

 

Half Say Revenue Rule Is Immaterial, One-Fifth Still Evaluating

(Compliance Week) September 15, 2017 – Mid-year disclosures by Fortune 500 filers show roughly half of those companies expect the pending new revenue recognition accounting standard to have an immaterial effect on their financial positions, but nearly 20 percent are still evaluating the situation.

PwC studied July through mid-August disclosures required by the Securities and Exchange Commission under Staff Accounting Bulletin No. 74 regarding pending accounting standards to gauge the overall impact of major new changes that are on the horizon. The analysis shows one-third of companies had not yet produced hard numbers to tell investors what impact of the new accounting standard will produce. Only 2 percent had disclosed they expect the new accounting to produce a material impact on financial statements.

The new revenue recognition standard, published by the Financial Accounting Standards Board in 2014, takes effect for public companies with the start of the 2018 reporting year. That’s a year later than the FASB initially required. The SEC has signaled to companies it is looking for robust SAB 74 disclosures, both quantitative and qualitative, to give investors some advance notice of how the company’s financial statements will change based on the new accounting.

In terms of how they will adopt the new revenue recognition standard, only 11 percent said they are adopting following the full retrospective method, which provides three complete years of data in financial statements as if the standard had been in effect throughout those three years. Nearly 60 percent said they were implementing under the modified retrospective approach, which uses cumulative adjustments and plenty of disclosure to give the historical perspective on prior years. One-third said they had not yet determined their adoption method or did not say what method they planned to use.

In addition to disclosures about revenue recognition, PwC also tabulated disclosures about other major accounting changes coming in 2019 and 2020, such as lease accounting and credit losses, respectively. Nearly 60 percent of companies had not disclosed anything about how the new lease accounting standard will affect their financial statements or said they are still evaluating the situation.

Roughly one in five of the publicly traded Fortune 500 companies said they expect the lease accounting changes to have a material impact. The new lease accounting standard brings on to corporate balance sheets as assets and liabilities virtually all property and equipment that companies acquire through lease arrangements. Under current rules, companies have long disclosed most leases only in footnotes to financial statements while expensing related costs through the income statement.

A similar but slightly smaller number of companies, 17 percent, have made some qualitative disclosures about how they’ll be affected by the new lease accounting, but have not given any hard data to investors. Only 3 percent have said they expect the impact to be immaterial.

As for credit losses, the most distant of the major accounting changes in terms of when it takes effect, 87 percent of companies have made no disclosures or have said they are evaluating how they will be affected. As for the rest, 2 percent said they expect a material effect, 6 percent said they expect an immaterial effect, and 5 percent have made qualitative but not quantitative disclosures.

 

 

 

 

 

FASB Takes Step to Further Simplify Hedge Accounting Rules

(AccountingWEB) September 18, 2017 – The Financial Accounting Standards Board (FASB) has issued a final standards update intended to improve and simplify hedge accounting rules.

The new standard expands hedge accounting for financial and commodity risks, according to the FASB. It allows more transparency for the presentation of economic results in the body of financial statements and in footnotes.

The update takes effect for fiscal years (and interim periods within those fiscal years) beginning after Dec. 15 for public companies, and for fiscal years beginning after Dec. 15, 2019 (and interim periods for fiscal years beginning after Dec. 15, 2020) for private companies. Early adoption is permitted in any interim period or fiscal years before the effective date of the standard.

“Companies and investors alike have expressed overwhelming support for this long-awaited standard,” said FASB Chairman Russell Golden in a statement. “Thanks to their input, the final [update] better aligns the accounting rules with a company’s risk management activities, better reflects the economic results of hedging in the financial statements, and simplifies hedge accounting treatment.”

The update, No. 2071-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities, was released in answer to stakeholders’ concerns that the hedge accounting requirements in current generally accepted accounting standards (GAAP) don’t always permit an entity to properly recognize the economic results of its hedging strategies in its financial statements.

Stakeholders insisted that improvements to the hedge accounting model are needed to make financial reporting more closely reflect an entity’s risk management activities. They also noted that the effect of hedge accounting on reported results often is tough to understand and interpret. Stakeholders stressed that reported results should help financial statement users better understand an entity’s exposures to risk and how hedging strategies manage those exposures.

Here’s what the FASB says the amendments accomplish:

  • A closer alignment of the results of cash flow and fair value hedge accounting with risk management activities in changes to the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.
  • Specific limits in current GAAP are addressed by expanding hedge accounting for nonfinancial and financial risk components.
  • The measurement of hedge results are refined to better reflect an entity’s hedging strategies.
  • An entity will be able to better report the economic results of hedging activities for certain fair value and cash flow hedges.
  • Mismatched earnings will be avoided by allowing more precision when measuring changes in the fair value of the hedged item for certain fair value hedges.
  • By aligning the timing of recognition of hedge results with the earnings effect of the hedged item for cash flow and net investment hedges, and by including the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is presented, the results of an entity’s hedging program and the cost of executing that program will be more visible to users of financial statements.
  • The tabular disclosure related to effects on the income statement of fair value and cash flow hedges and the disclosure of cumulative basis adjustments for fair value hedges provide users with a more complete picture of the effect of hedge accounting on an entity’s income statement and balance sheet.
  • The amendments should ease the operational burden of applying hedge accounting by allowing more time to prepare hedge documents and by allowing assessments of effectiveness to be done on a qualitative basis after hedge inception.

The FASB will host a one-hour webinar about the update Sept. 25, from 1 p.m. to 2 p.m. ET. The webinar is free for those who preregister.

Presenters include FASB Vice Chairman James Kroeker, FASB member R. Harold Schroeder, and members of the FASB project team. Viewers will be eligible for up to 1.2 continuing professional education credits. Registration and other information is available on the FASB website.

 

 

 

 

 

Auditors May Have to Keep Artificial Intelligence from Cooking the Books

(Going Concern) By Megan Lewczyk, September 18, 2017 – Some smart people are starting to contemplate how to keep artificial intelligence safe and in-check. It’s a fascinating topic, especially after Facebook had to shut down their AI chatbot after it started to develop its own language in August. Plus, I have a feeling it’s going to trickle into the scope of work for an audit team through Sarbanes-Oxley and internal control testing. Here’s why:

Who else has access to all public companies to enforce future AI mandates that require compliance?

I can’t think of a better group. Auditors are already poking around the IT department for other controls. It only seems logical that AI would fall into the lap of the IT audit and attestation teams to ensure that the financial data (and humanity too) is safe from manipulation. No one wants to see a self-serving robot cooking the books. You can’t put an artificially-intelligent machine in jail, after all. Their antics may have nothing to do with the developer if the robot had devised its devious plan to wreak havoc without human interference.

Maybe this seems silly but it’s a big issue according to AI pioneers. In a recent TED talk, Stuart Russell quoted Alan Turing from 1951:

“Even if we could keep the machines in a subservient position, for instance, by turning off the power at strategic moments, we should, as a species, feel greatly humbled.”

Russell says that shutting the power off is important, along with some other safety considerations when we go to build a super-intelligent robot. He suggests three principles (i.e. programmed characteristics) that all AI should have:

  • Altruism or “that the robot’s only objective is to maximize the realization of human objectives, of human values.”
  • Humility or “avoidance of single-minded pursuit of an objective.”
  • Learning from bad behavior or negative human interactions (e.g., the robot is turned off for not acting appropriately and doesn’t do it again)

Sam Harris, another AI philosopher, also warns of the dangers of runaway super intelligence, especially as it starts to be more general and less task specific. The thing these two guys both allude to is the danger of letting AI loose without internal controls.

I foresee IT general controls (ITGCs) evolving to include artificial intelligence control considerations and testing. I envision it would drop into the list of the following:

  • Logical access controls
  • Physical access controls
  • Computer operation (backups, job processing) controls
  • Program change management controls
  • Program development controls
  • Artificial intelligence and human override controls

An example control would include:

  • Artificially-intelligent machines and applications are programmed to permit human override and shut down.

It may not be anytime soon that this type of control consideration starts popping up mainstream and testing commences by auditors. But, it’s worth putting into the universe since it may be sooner than we think.