Attention: Accounting rule delays in the works

On July 17, the Financial Accounting Standards Board (FASB) voted to issue a proposal that would delay several landmark accounting rules for certain companies. If finalized, the deferral would apply to new guidance for reporting leases, hedging transactions, credit losses and long-term insurance contracts.

Summary of the changes

The following table summarizes key implementation date changes that the FASB unanimously voted to propose:

The term “smaller reporting companies” refers to those that have either 1) a public float of less than $250 million, or 2) annual revenue of less than $100 million and no public float or a public float of less than $700 million.

Unexpected delays

Private companies and nonprofits often receive an extra year to implement major accounting standards updates, compared to the effective dates that apply to public companies. In a shift in its philosophy for setting reporting dates on major new accounting standards, the FASB wants to give certain entities even longer to implement the changes.

Why are these delays needed? Many entities continue to struggle with implementing the new revenue recognition guidance that went into effect in 2018 for public companies and 2019 for other entities. A possible deferral of other new rules would also allow smaller entities to learn from public companies how to implement the changes — and it would give accounting software providers extra time to update their packages to support the new reporting models.

Proposal is coming soon

The FASB is expected to issue its proposal as soon as possible. Then it will be subject to a 30-day comment period.

These deferrals, if finalized, would be welcome news for many organizations. But they’re not an excuse to procrastinate. Depending on your industry and the nature of your transactions, implementing the changes and educating stakeholders could take significant resources. Contact us before the implementation deadline to come up with a realistic game plan.

© 2019


4 tough questions to ask about your sales department

Among the fastest ways for a business to fail is because of mismanagement or malfeasance by ownership. On the other hand, among the slowest ways is an ineffective or dysfunctional sales department.

Companies suffering from this malady may maintain just enough sales to stay afloat for a while, but eventually they go under because they lose one big customer or a tough new competitor arrives on the scene. To ensure your sales department is contributing to business growth, not just survival, you’ve got to ask some tough questions. Here are four to consider:

1. Does our sales department communicate customers’ needs to the rest of the company? Your sales staff works on the front lines of your industry. They’re typically the first ones to hear of changes in customers’ needs and desires. Make sure your sales people are sharing this information in both meetings and written communications (sales reports, emails and the like).

It’s particularly important for them to share insights with the marketing department. But everyone in your business should be laser-focused on what customers really want.

2. Does the sales department handle customer complaints promptly and satisfactorily? This is related to our first point but critical enough to investigate on its own. Unhappy customers can destroy a business — especially these days, when everyone shares everything on social media.

Your sales staff should have a specific protocol for immediately responding to a customer complaint, gathering as much information as possible and offering a fair resolution. Track complaints carefully and in detail, looking for trends that may indicate deeper problems with your products or services.

3. Do our salespeople create difficulties for employees in other departments? If a sales department is getting the job done, many business owners look the other way when sales staff play by their own rules or don’t treat their co-workers with the utmost professionalism. Confronting a problem like this isn’t easy; you may unearth some tricky issues involving personalities and philosophies.

Nonetheless, your salespeople should interact positively and productively with other departments. For example, do they correctly and timely complete all necessary sales documents? If not, they could be causing major headaches for other departments.

4. Are we taking our sales staff for granted? Salespeople tend to spend much of their time “outside” a company — either literally out on the road making sales calls or on the phone communicating with customers. As such, they may work “out of sight and out of mind.”

Keep a close eye on your sales staff, both so you can congratulate them on jobs well done and fix any problems that may arise. Our firm can help you analyze your sales numbers to help identify ways this department can provide greater value to the company.

© 2019


What to expect during a franchise audit



It’s important for franchisors to periodically audit individual franchisees. These routine “check-ups” are especially valuable in a store’s early years of operations or if performance starts to deteriorate. They can be used to detect symptoms of unhealthy performance and treat problems before they spiral out of control.

 

Focus on royalty payments

Royalties are a franchisor’s primary source of income. Because royalties are typically based on a percentage of revenue, auditors pay close attention to the franchisee’s revenue reporting process.

To test whether revenue has been accurately reported, auditors trace transactions from the point-of-sale to:

  • The franchisee’s financial records,
  • Revenue reported to the franchisor, and
  • Tax returns submitted to the state and federal government.

If the revenue trail doesn’t hold up, further investigation may be required. In addition to vouching a representative sample of randomly selected sales transactions, auditors use analytical techniques to compare key metrics for an individual franchisee against benchmarks for franchises of a similar size and others in your franchise system. Any discrepancies from these benchmarks raise a red flag that the franchisee may have underreported revenue to minimize royalty payments.

Standard operating procedures

Beyond testing revenue, auditors spend extensive time examining whether the franchisee has complied with the franchise agreement. They consider such questions as:

  • Is the franchisee spending the required amount on advertising?
  • Does its signage comply with brand standards?
  • Is the franchisee purchasing materials and supplies from approved vendors?
  • Is the HR manager conducting appropriate employee background checks?

Failure to comply with such terms compromises future revenue and the reputation of your brand. So, areas of noncompliance should be identified during the audit — and corrected as soon as possible.

Site visits

Analyzing a franchisee’s books and records can only reveal so much. There’s no substitute for meeting face-to-face with the owner-operator.

Site visits give the auditor an opportunity to assess business operations from the customer’s perspective, evaluate the condition of equipment and the morale of workers, and interview the management team. These inquiries help the auditor understand how the business operates and investigate any anomalies unearthed during testing and analytical procedures.

Need help?

Hiring an outside auditor to enforce the audit provisions of your franchise agreement brings objectivity and financial expertise to the process. In addition to auditing a franchisee’s financial statements, our team can follow up on any compliance issues unearthed by the audit. Contact us for more information.

© 2019  


Corporate governance in the 21st century

What’s the purpose of a corporation? For the last 50 years, the answer was “to maximize shareholder value.” But, on August 19, CEOs of 181 leading U.S. businesses, including Amazon, Apple, General Motors and Walmart, pledged to broaden the scope.

Beyond shareholder value

Putting shareholders first was the doctrine of University of Chicago economist Milton Friedman. In 1970, he famously wrote that “the social responsibility of business is to increase its profits.” While this mindset has enriched large shareholders, it’s also had negative consequences, including pay disparities between executives and frontline workers, layoffs and pollution.

Last year, Chairman of the Business Roundtable Jamie Dimon launched a project to update its principles. The new version of its Principles of Corporate Governance looks beyond delivering value to shareholders. It also recognizes the importance of:

  • Investing in employees through training and education, as well as providing fair compensation and benefits,
  • Fostering diversity, inclusion, dignity and respect in the workplace,
  • Dealing fairly and ethically with suppliers,
  • Supporting local communities,
  • Protecting the environment through sustainable business practices, and
  • Providing transparent and effective communications with shareholders and lenders.

For many business leaders who signed the new statement of purpose, these objectives represent a fundamental change in longstanding business principles. “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term. These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans,” said Chairman Dimon.

What you can do

Translating the statement’s lofty principles into concrete business practices will be challenging, especially if the changes cause earnings to fall over the short run. The key will be getting investor and lender buy-in by effectively communicating the link between adopting so-called “sustainable” business practices and building long-term shareholder value.

For example, identifying and successfully navigating sustainability issues can add value by building trust with stakeholders, providing improved access to capital and reduced borrowing costs, and enhancing customer and employee loyalty. Tracking sustainability also helps companies identify ways to reduce their energy consumption, streamline their supply chains, eliminate waste and operate more efficiently.

Conversely, aggressive tax strategies and regulatory violations can lead to fines, remedial costs and reputational damage. And the sale of toxic or unsafe products can result in product liability lawsuits, recalls and boycotts.

Disclosing the changes

Do your company’s financial statements include sustainability disclosures? Though they’re currently voluntary under U.S. Generally Accepted Accounting Principles (GAAP) and the financial reporting rules of the Securities and Exchange Commission (SEC), they can be worthwhile. These disclosures provide insight into various nonfinancial issues, such as:

  • Pollution and carbon emissions,
  • Union relations,
  • Political spending,
  • Tax strategies,
  • Training and diversity practices,
  • Health and safety matters, and
  • Human rights policies.

Our auditors can help you draft disclosures that explain your sustainability efforts to stakeholders in a clear, objective manner and establish links to financial performance. Contact us for more information.

© 2019


Associations: Avoid certain activities to preserve tax-exempt status

Nonprofit trade associations, or 501(c)(6) organizations, exist to promote their members’ common interests and improve business conditions or “one or more lines of interest.” Whether the association is a local chamber of commerce, a real estate board or a large professional group, associations’ tax-exempt status is contingent on their sponsoring certain types of activities — and avoiding others. When they fail to do so, the IRS may take action.

Misinterpreting terms

Typically, associations get into trouble when they interpret terms such as “promote common interests” and “improve business conditions” too broadly. For example, they might provide customized sales training for only some of their members. But associations don’t qualify for tax-exempt status if they exist only to perform services for individual members.

Another potential violation is engaging in business that’s normally carried out on a for-profit basis. And groups that are primarily social or that exist to promote a hobby generally don’t qualify for 501(c)(6) status.

Differentiating between activities

To avoid IRS scrutiny, you must be able to differentiate between qualified and nonqualified activities. For example, it’s acceptable to attempt to influence legislation relating to the common business interests of your members. You can also test and certify products and establish industry standards; publish statistics on industry conditions to promote your members’ line of business; and research effective business practices and share that information with your members.

But you should limit activities if they benefit specific members rather than the industry or profession as a whole. These might include:

  • Selling advertising in member publications,
  • Facilitating the purchase of supplies for members,
  • Providing workers’ compensation insurance to members.

Your association’s “primary purpose” is key. Most 501(c)(6) groups perform some activities that don’t primarily serve common business interests. But these activities generally should be limited in scope and number.

Avoiding UBIT

Even when certain activities don’t threaten your exempt status, performing services for members can trigger unrelated business income tax (UBIT). Typically, members pay for such services directly, instead of through dues or other common assessments. Depending on the services your association provides and the revenues raised, additional reporting may be required and you may owe UBIT.

Stop and reassess if you’re performing more services, or more substantial ones, for individual members. Instead, you might form a separate for-profit organization to offer those services.

Keeping your focus

The IRS is on the lookout for 501(c)(6) associations that don’t promote common business interests. If yours doesn’t, it may be time to review and revise your offerings. Contact us for help.

© 2019


Run your strategic-planning meetings like they really matter

Many businesses struggle to turn abstract strategic-planning ideas into concrete, actionable plans. One reason why is simple: ineffective meetings. The ideas are there, lurking in the minds of management and key employees, but the process for hashing them out just doesn’t work. Here are a few ways to run your strategic-planning meetings like they really matter — which, of course, they do.

Build buy-in

Meetings often fail because attendees feel more like spectators than participants. They are less likely to zone out if they have some say in the direction and content of the gathering. So, before the session, touch base with those involved and establish a clear agenda of the strategic-planning initiatives you’ll be discussing.

Another common problem with meetings occurs when someone leads the meeting, but no one owns it. As the meeting leader, be sure to speak with conviction and express positivity (if not passion) for the subject matter. (If others are delivering presentations during the proceedings, encourage them to do the same.)

Fight fatigue

To the extent possible, keep meetings short. Cover what needs to be covered, but ensure you’re concentrating only on what’s important. Go in armed with easy-to-follow notes so you’ll stay on track and won’t forget anything. The latter point is particularly important, because overlooked subjects often lead to hasty follow-up meetings that can frustrate employees.

In addition, if the contingent of attendees is large enough, consider having employees break out into smaller groups to focus on specific points. Then call the meeting back to order to discuss each group’s ideas. By mixing it up in such creative ways, you’ll keep employees more engaged.

Tell a story

There’s so much to distract employees in a meeting. If it’s held in the morning, the busy day ahead may preoccupy their thoughts. If it’s an afternoon meeting, they might grow anxious about their commutes home. If the meeting is a Web conference, there are a variety of distractions that may affect them. And there’s no getting around the ease with which participants can sneak peeks at their smartphones (or smart watches) to check emails, texts and the Internet.

How do you break through? People appreciate storytellers. So, think about how you can use this technique to find a more relaxed and engaging way to speak to everyone in the room. Devise a narrative that will grab attendees’ attention and keep them in suspense for a little bit. Then deliver a conclusion that will inspire them to work toward identifying fully realized, feasible strategic goals.

Make ’em great

Grumbling about meetings can be as much a part of working life as burnt coffee in the bottom of the breakroom pot. But don’t let this occasional negativity sway you from doing the critical strategic planning that every business needs to do. Your meetings can be great ones. We can’t help you run them, but we can assist you in assessing the financial feasibility and ramifications of your strategic plans.

© 2019


Odd word, cool concept: Gamification for businesses

“Gamification.” It’s perhaps an odd word, but it’s a cool concept that’s become popular among many types of businesses. In its most general sense, the term refers to integrating characteristics of game-playing into business-related tasks to excite and engage the people involved.

Might it have a place in your company?

Internal focus

Sometimes gamification refers to customer interactions. For example, a retailer might award customers points for purchases that they can collect and use toward discounts. Or a company might offer product-related games or contests on its website to generate traffic and visitor engagement.

But, these days, many businesses are also using gamification internally. That is, they’re using it to:

  • Engage employees in training processes,
  • Promote friendly competition and camaraderie among employees, and
  • Ease the recognition and measurement of progress toward shared goals.

It’s not hard to see how creating positive experiences in these areas might improve the morale and productivity of any workplace. As a training tool, games can help employees learn more quickly and easily. Moreover, with the rise of social media, many workers are comfortable sharing with others in a competitive setting. And, from the employer’s perspective, gamification opens all kinds of data-gathering possibilities to track training initiatives and measure employee performance.

Specific applications

In most businesses, employee training is a big opportunity to reap the benefits of gamification. As many industries look to attract Generation Z — the next big demographic to enter the workforce — game-based learning makes perfect sense for individuals who grew up both competing in various electronic ways on their mobile devices and interacting on social media.

For example, safety and sensitivity training are areas that demand constant reinforcement. But it’s also common for workers to tune out these topics. Framing reminders, updates and exercises within game scenarios, in which participants might win or lose ground by following proper or improper work practices, is one way to liven up the process.

Game-style simulations can also help prepare employees for management or leadership roles. Online training simulations, set up as games, can test participants’ decision-making and problem-solving skills — and allow them to see the potential consequences of various actions before granting them such responsibilities in the real-word situations. You might also consider rewards-based games for managers or project leaders based on meeting schedules, staying within budgets, or preventing accidents or other costly mistakes.

Intended effects

Naturally, gamification has its risks. You don’t want to “force fun” or frustrate employees with unreasonably difficult games. Doing so could lower morale, waste time and money, and undercut training effectiveness.

To mitigate the downsides, involve management and employees in gamification initiatives to ensure you’re on the right track. Also consider involving a professional consultant to implement established and tested “gamified” exercises, tasks and contests. We can help you identify and assess the potential costs involved and keep those costs in line.

© 2019


Accountable plans save taxes for staffers and their nonprofit employers

Have staffers complained because their expense reimbursements are taxed? An accountable plan can address the issue. Here’s how accountable plans work and how they benefit employers and employees.

Be reasonable

Under an accountable plan, reimbursement payments to employees will be free from federal income and employment taxes and aren’t subject to withholding from workers’ paychecks. Additionally, your organization benefits because the reimbursements aren’t subject to the employer’s portion of federal employment taxes.

The IRS stipulates that all expenses covered in an accountable plan have a business connection and be “reasonable.” Additionally, employers can’t reimburse employees more than what they paid for any business expense. And employees must account to you for their expenses and, if an expense allowance was provided, return any excess allowance within a reasonable time period.

An expense generally qualifies as a tax-free reimbursement if it could otherwise qualify as a business deduction for the employee. For meals and entertainment, a plan may reimburse expenses at 100% that would be deductible by the employee at only 50%.

Keep good records

An accountable plan isn’t required to be in writing. But formally establishing one makes it easier for your nonprofit to prove its validity to the IRS if it is challenged.

When administering your plan, your nonprofit is responsible for identifying the reimbursement or expense payment and keeping these amounts separate from other amounts, such as wages. The accountable plan must reimburse expenses in addition to an employee’s regular compensation. No matter how informal your nonprofit, you can’t substitute tax-free reimbursements for compensation that employees otherwise would have received.

The IRS also requires employers with accountable plans to keep good records for expenses that are reimbursed. This includes documentation of the amount of the expense and the date; place of the travel, meal or transportation; business purpose of the expense; and business relationship of the people fed. You also should require employees to submit receipts for any expenses of $75 or more and for all lodging, unless your nonprofit uses a per diem plan.

Inexpensive retention tool

Accountable plans are relatively easy and inexpensive to set up and can help retain staffers who frequently submit reimbursement requests. Contact us for more information.

© 2019


Grading the performance of your company’s retirement plan

Imagine giving your company’s retirement plan a report card. Would it earn straight A’s in preparing your participants for their golden years? Or is it more of a C student who could really use some extra help after school? Benchmarking can tell you.

Mind the basics

More than likely, you already use certain criteria to benchmark your plan’s performance using traditional measures such as:

  • Fund investment performance relative to a peer group,
  • Breadth of fund options,
  • Benchmarked fees, and
  • Participation rates and average deferral rates (including matching contributions).

These measures are all critical, but they’re only the beginning of the story. Add to that list helpful administrative features and functionality — including auto-enrollment and auto-escalation provisions, investment education, retirement planning, and forecasting tools. In general, the more, the better.

Don’t overlook useful data

A sometimes-overlooked plan metric is average account balance size. This matters for two reasons. First, it provides a first-pass look at whether participants are accumulating meaningful sums in their accounts. Naturally, you’ll need to look at that number in light of the age of your workforce and how long your plan has been in existence. Second, it affects recordkeeping fees — higher average account values generally translate into lower per-participant fees.

Knowing your plan asset growth rate is also helpful. Unless you have an older workforce and participants are retiring and rolling their fund balances into IRAs, look for a healthy overall asset growth rate, which incorporates both contribution rates and investment returns.

What’s a healthy rate? That’s a subjective assessment. You’ll need to examine it within the context of current financial markets. A plan with assets that shrank during the financial crisis about a decade ago could hardly be blamed for that pattern. Overall, however, you might hope to see annual asset growth of roughly 10%.

Keep participants on track

Ultimately, however, the success of a retirement plan isn’t measured by any one element, but by aggregating multiple data points to derive an “on track to retire” score. That is, how many of your plan participants have account values whose size and growth rate are sufficient to result in a realistic preretirement income replacement ratio, such as 85% or more?

It might not be possible to determine that number with precision. Such calculations at the participant level, sometimes performed by recordkeepers, involve sophisticated guesswork with respect to participants’ retirement ages and savings outside the retirement plan, as well as their income growth rates and the long-term rates of return on their investment accounts.

Ask for help

Given the importance of strong retirement benefits in hiring and retaining the best employees, it’s worth your while to regularly benchmark your plan’s performance. For better or worse, doing so isn’t as simple as 2+2. Our firm can help you choose the relevant measures, gather the data, perform the calculations and, most important, determine whether your retirement plan is really making the grade.

© 2019


COBRA fraud: When an employer can terminate early

Employers with 20 or more employees are generally required to offer continuing health care coverage to departing staff members. This is commonly referred to as “COBRA” after the legislation that made it law: the Consolidated Omnibus Budget Reconciliation Act of 1985.

Like any type of health care benefit, COBRA coverage can present an opportunity for dishonest individuals to try to commit fraud. If you catch a qualified beneficiary submitting a fraudulent claim to your employer-sponsored health plan, you may be able to terminate his or her coverage early — but only if you follow the rules.

3 requirements

You may terminate a qualified beneficiary’s COBRA coverage for submission of fraudulent claims if three requirements are met:

  1. Your health plan must permit you to terminate active employees’ coverage for the same reason.
  2. The plan must allow you to terminate COBRA coverage for cause.
  3. The plan’s COBRA notices and communications must disclose the plan’s right to terminate coverage for cause.

You may terminate a qualified beneficiary’s COBRA coverage before the end of the maximum coverage period (generally 18 or 36 months, depending on the qualifying event) only for reasons specified in the COBRA statute and regulations.

The regulations specify that a qualified beneficiary’s coverage may be terminated for cause on the same basis that would apply to similarly situated active employees under the terms of the plan. Submission of fraudulent claims is listed as an example.

Thus, if an active employee’s coverage may be terminated for submission of fraudulent claims, COBRA coverage may be terminated early for the same reason. But this holds true only as allowed under the plan and disclosed in COBRA notices and the plan’s summary plan description.

Proceed with caution

There’s little additional guidance on early termination of COBRA for cause — submission of fraudulent claims is the only basis that’s specifically mentioned in the regulations. If you decide to terminate a qualified beneficiary’s coverage based on a fraudulent submission, don’t forget about the required notice of termination of COBRA coverage that must be sent to any qualified beneficiary whose COBRA coverage terminates before the expiration of the maximum coverage period.

Should you wish to terminate COBRA coverage early for other types of misconduct, you’ll need to analyze the circumstances to determine whether the plan would allow termination of an active employee’s coverage for that transgression.

Ask for help

Don’t terminate coverage early, whether for fraud or another reason, without consulting legal counsel and your plan’s insurer or stop-loss insurer, if applicable. Our firm can provide assistance in monitoring and managing the financial risks of offering health care benefits.

© 2019