Author: CFOconnections

By CFOconnections

What to Expect from the Second Round of the Federal Stimulus Package Funding?

The first round of the $350 billion opened for application on April 3 and in less than 2 weeks, the SBA announced that it was unable to process additional applications from small businesses because funding has lapsed. The second round of the PPP funding of $484 billion is expected to hit the President’s desk for his signature this week. This second round of funding is expected to replenish the PPP and the EIDL loans. After the first round of funding, here is what we heard and what we can expect from the second round.

What Happened in Round 1?

  1. 74.03% of all approved PPP loans in the US were $150k and Under

2. 0.27% of all approved PPP loans in the US were over $5M

3. Over 95% of all loans approved under the PPP loan program were $1M and less

Despite the statistics, some large companies with liquidity also received the PPP loan and a few had to return the loan amid public pressure, such as the fast food hamburger joint Shake Shack.

Community banks came through for small businesses during the first round of the PPP funding since they are a bit smaller but more nimble. Large financial institutions such as Bank of America, Wells Fargo, JP Morgan, among others, have been accused of prioritizing larger loans and shutting out smaller businesses from getting the much needed financial relief.

When it came to processing PPP loan applications, banks were making their own rules, with some accepting the standard SBA application form and the certifications on the form, some required additional certifications from business owners, some wanted owners to certify that they did not or would not apply for the EIDL loans, etc. Some not only required businesses to be existing clients, but also added requirements such as certain types of accounts or a credit relationship.

The SBA originally set out to provide a maximum $50,000 EIDL loan with a $10,000 immediate advance to small businesses but due to funding drying up faster than expected, it revised its approach to providing only a $15,000 EIDL loan with a $1,000 advance.

What to Expect from Round 2?

Round 2 will allocate around $60 billion of PPP funds to smaller financial institutions which is good news for smaller businesses. We expect to see banks continue to supplement the standard application and required documentations with their own required certifications or require additional documents, depending on each of their own risk evaluation.

Since the first round of funding has been exhausted, small businesses who submitted their applications but did not receive funding from the first round should contact their banks to understand whether their application will be put in a queue for the second round of funding. This does not necessary mean though you are guaranteed funding by your bank. It all depends on how quickly your application is being submitted. It is estimated that the second round of funding could run out in 48 hours once the application process opens. If you are one of those businesses, our recommendation is to stay in close contact with your banks. Since bankers are busy processing applications, most of them are not answering their phones. E-mails would be the best way to communicate.

For independent contractors and self-employed individuals – you also qualify for PPP if you meet the requirement. The recommendation for these individuals would be in line with those for small businesses – continue to stay in contact with your banks and inquire about the status of your application.

If you’ve already applied for the SBA’s EIDL loan during the first round and did not receive funding, you should not need to reapply since the SBA will continue to process applications that are already in its system.

CFO Connections success stories: Clients who sought our help in preparing their PPP applications, computing the amount of the loan, and receiving advice on the appropriate documents to include with their applications, were able to secure the funding they needed during the first round with no adjustment by their banks on the requested loan amounts. We have a 100% success rate. Contact us for assistance with your funding needs.

By CFOconnections

Staying Compliant with PPP and Cash Flows Management

The government’s Paycheck Protection Program (PPP) from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides much needed relief to small businesses across the nation to keep workforce employed and businesses afloat. You may have already applied for the loan and are currently waiting for your bank to fund it. Now would be a good time to get up to speed on the requirements of the program, the credits available to businesses, some questions to ask your accountants, and our recommendations on how best to handle the funds. We also have recommendations on ways to accelerate cash flows from customers and defer payments to vendor during this crisis.

Paycheck Protection Program (PPP)

When the loan is funded, it is best to have the proceeds deposited into a separate bank account so that disbursements from the proceeds can be easily tracked and substantiated.

When figuring out the loan amount for the PPP loan, any salary over $100,000 per employee is excluded. This is crucial because it affects how much of the loan proceeds can be forgiven. For the highly compensated employees (mainly the business owner and senior management), what does this mean for their compensation?

The essence of the PPP is to keep workers employed so keep an eye on your head count as it would have an impact on the amount of the loan that can be forgiven.

How do you make sure that your PPP loan is forgiven? What documentations is a business required to provide to substantiate the use of proceeds?

The program provides for deferral of employer’s share of the payroll taxes. If a business received a PPP loan and paid its employees with the proceeds, when is it required to remit the employer’s share of the payroll taxes? Have you reached out to your payroll processing company to understand whether they have the capability to remit the correct amount of payroll taxes on your behalf?

The CARES Act also provides for an employee retention credit at 50% of the first $10,000 wages per employee. Am I eligible to claim the credit?

Can a business use tax-exempt income (e.g. forgivable PPP loan) to generate deductions (e.g. payroll, mort int, rent, etc.)?

Cash Flows Management

Be proactive and contact your vendors. Those who were rigid in their payment terms in the past may be accommodating due to current crisis. It is important to maintain supplier relationships, avoid unnecessary turnover and continue to meet customer demands.

Contact your customers to ask for payment even though most businesses have been negatively impacted by this pandemic. Accept partial payments and offer payment discount to entice customers to pay in full if they have the ability.

Call credit card companies to inquire about delaying payments and interest accrual. Most credit card companies are willing to make accommodating during the current crisis.

Consider reducing discretionary expenses, such as certain advertising and marketing expenses when your target customers are also negatively impacted by this crisis, client meals/entertainment, etc.

Consider pay cut to ownership and senior management instead of reducing workforce so that you are able to meet customers’ demands when the turnaround occurs.

Having a trusted advisor on your side could mean keeping the train on the tracks and avoiding surprises. Contact us if you have questions on your mind.

By CFOconnections

How to Survive in Unprecedented Times

We are living in unprecedented times right now. Many aspects of our lives are drastically changed, businesses are facing difficult decisions of preserving and prioritizing cash flows and maintaining a level of workforce to continue to meet customers demands. Therefore, having a good pulse on your cash flows requirement is extremely important, especially during the current crisis. Let’s take a look at what a cash flows projection entails and how it can help business owners see the reality and forge a logical path forward.

Traditional accrual basis income statement are often unhelpful when it comes to cash flows management. It can especially be misleading during a crisis. The concept of a cash flows projection is relatively simple… tallying all your sources of cash and uses of cash during the period of the analysis. The nuances of how to build a cash flows projection is more complicated. It requires looking at your customers and suppliers and your relationships with them. A well crafted cash flows projection will provide a road map for running business while it becomes a critical tool in managing cash flows during unprecedented times like this.

At the beginning of the projection, business owner will need to consider making certain assumptions. For example, when will we receive payments from our larger customers? What payment terms do we have with our essential vendors? Will our relationships with our customers and vendors allow us to accelerate receipts and defer payments in difficult times, such as the current COVID-19 pandemic? Answering these questions will have a drastic impact on the timing of the cash flows.

During the current COVID-19 crisis, business owner should also consider whether there is any government stimulus financial assistance available that should be factored into the cash flows projection. On the other hand, any restricted use of the assistance should also be included in the projection. If the financial assistance is in the form of a loan, business owner should also consider the timing of the principle and interest payments in the projection.

In addition, small and medium size businesses has been depending on using credit cards to pay certain expenses in order to defer cash flows. This practice will have an impact on cash outflows and should be considered when crafting a cash flows projection.

A cash flows projection is a tool that sets the foundation and the basis for reviewing the assumptions made. Business owner should use this tool to compare to actual results and determines whether the assumptions are realistic. Are we being too conservative on projecting cash outflows but too liberal on estimating cash inflows? If we identify gaps in cash flows, business owner should begin exploring options for alternative source of capital. Perhaps a discussion with its banking partner to review available options.

A cash flows projection and its assumptions should be reviewed and updated on a weekly basis. When adjustment to the projection and its assumptions is necessary, it is imperative to make those adjustments on a going forward basis so that the going-forward projection is not skewed by timing differences. Monitoring the projection on a weekly basis will give business owner the opportunity to correct course timely when traditional accrual basis financial statements will not. It allows business owner to see whether the company will survive in the immediate and long-term. It is an immensely valuable tool for business owner during ordinary time, and especially in distressed situation.

If you want to know the survivability of your business, please contact us for a complimentary consultation.

By CFOconnections

Coronavirus Resources for Businesses and Taxpayers

While our minds are occupied by this pandemic, I hope that you find the following resources helpful in getting through your businesses during this critical time.

IRS extends tax filing and payment deadline to July 15 as COVID-19 spreads

SEC Provides Conditional Regulatory Relief and Assistance for Companies Affected by the Coronavirus Disease 2019 (COVID-19)

The Florida Small Business Emergency Bridge Loan Program is currently available to small business owners located in all Florida counties statewide that experienced economic damage as a result of COVID-19.

SBA to Provide Disaster Assistance Loans for Small Businesses Impacted by Coronavirus (COVID-19)

The Families First Coronavirus Response Act: What It Does For Employees Who Need Paid Sick Leave

Florida Governor Ron DeSantis has announced the activation of the Business Damage Assessment Survey to assess the impact of the COVID-19 coronavirus on Florida’s local businesses, including those in Hillsborough County.  If you are a business impacted by the COVID-19, it is critical that you take the time to complete this survey. 

What you need to know about COVID-19, resources for the community, information for healthcare professionals, and latest updates

What to do if you suspect you contracted the disease, resource toolkit from the Florida Department of Health

FAQs, latest updates, local resources, and more

By CFOconnections

7 Ways to Help Grow Your Business Without Cash Flows Concerns

You’ve poured blood, sweat and tears into your business and it is finally paying off. But, passing on that big sale or superstar hire because your business doesn’t have the cash to see it through could be a big setback. You can manage your business’s growth without the pain of capital and cash-flow concerns. Doing so requires a strategic approach that includes both pursuing opportunities and avoiding pitfalls.

  1. Analyze objectively

Opportunities come in all shapes and sizes and some are better than others. When considering investing in infrastructure, new hire, or other investment, think big picture such as the impact it will have on your brand, earnings trajectory, and organizational structure, etc. Focusing on short term profit alone may not be good for your organization’s long term health.

2. Be in the know

Rather than being surprised by upcoming cash flows needs, such as making payroll or a major vendor’s invoice coming due, get ahead of the game by having a cash flows projection. A cash flows projection is the crystal ball into a company’s future cash flows needs. A cash flows projection will allow you to see gaps before they actually happen so that you can line up your funding sources to bridge those gaps. On the flip side, it also allows you to strategically pursue opportunities.

3. Take control of cash flow

As your company grows, install systems and processes to ensure you’re managing your cash flow well. Instead of sending out invoices at the end of each month, send them out as soon as you completed the jobs. You may also consider offering a discount for fast payments, or allowing your customers to finance the invoice. These options allow your company to get paid upfront while giving customers the option to make payments over time.

4. Evaluate your borrowing options

When your business is growing, you may need new credit opportunities to provide you additional capital. Make sure you understand the return on investment (ROI) each dollar will bring to your business. Small business lending should always be a revenue-generating activity and never a take-it-because-it’s-there decision. Take only exactly what you need and when you need it and so that you have time to assess the ROI to your business.

5. Diversify your funding sources

Capital is the fuel to businesses of all sizes, whether just starting out or growing quickly. Businesses benefit from peace the mind when they have access to capital when needed. Not all business expenses can be paid the same way. For example, you can’t issue payroll on your business credit card. So, multiple funding sources allow you have the option to select the right source for each expense. Consider all of your options and use them at your disposal to create a capital and cash flow safety net. You can make a lot of mistakes and see your way through them if you have the cash.

6. Talent on demand

With a tight labor market, it becomes more costly to hire and keep good talents. Your best solution may be to bring on just-in-time workers. These are individuals with specific skill sets you bring on only when you need them to perform specific tasks. It’s the beauty of the currently thriving gig economy. “Flex talent” helps you control labor costs before you’re ready to bring on another full-time employee.

7. Partner up with your competitors

Keeping inventory in stock is a catch 22. You need inventory to sell to generate revenue, but you need revenue to pay for products or raw materials to sell. Building relationships with competitors can help. Consider buying from other companies that sell the same stock. If you can negotiate a discount for a longer-term relationship, the companies can essentially split the profit margin.

Looking for more advice on improving your business’s cash flows? Contact us for a complimentary consultation.

US Department of Labor Final Overtime Rule – how does it impact my cash flows?
By CFOconnections

US Department of Labor Final Overtime Rule – how does it impact my cash flows?

CFO Connections attended a briefing from the US Department of Labor Wage and Hour Division on the final rule on overtime pay, effective January 1, 2020. Here are some of the important questions addressed during the briefing.

Q. How many workers will become overtime-eligible as a result of this Final Rule?

An estimated 1.3 million workers will become newly entitled to overtime protection because of the increase in the salary level.

Q. What will the “Overtime” Final Rule do?

The final rule updates the earnings thresholds necessary to exempt executive, administrative, or professional employees from the FLSA’s minimum wage and overtime pay requirements. They are exempt if they are employed in a bona fide executive, administrative, or professional (EAP) capacity, as those terms are defined in the Department of Labor’s regulations at 29 CFR part 541 .

Q. What is “overtime”?

Unless specifically exempted, employees covered by the FLSA must receive pay for hours worked in excess of 40 in a workweek at a rate not less than one and one-half their regular rate of pay. This rate is referred to as “overtime” pay.

Q. What determines if an employee falls within one of the exemptions?

To qualify for an exemption in this rule an employee generally must:

  1. be salaried, meaning that they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”);
  2. be paid at least a specified weekly salary level, which is $684 per week (the equivalent of $35,568 annually for a full-year worker) under this final rule (the “salary level test”), the current salary level is $455 per week (the equivalent of $23,660 annually for a full-year worker); and
  3. primarily perform executive, administrative, or professional duties, as defined in the Department’s regulations (the “duties test”).

Certain employees are not subject to either the salary basis or salary level tests (for example, doctors and lawyers). The Department’s regulations also provide an exemption for certain highly compensated employees (HCEs) who earn above a higher total annual compensation level ($107,432 under this final rule) and satisfy a minimal duties test.

Q. May employers use bonuses to satisfy part of the new standard salary level test?

Yes. In recognition of evolving pay practices, the Department is permitting employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary test requirement. Such bonuses include, for example, nondiscretionary incentive bonuses tied to productivity or profitability (e.g., a bonus based on the specified percentage of the profits generated by a business in the prior year). The Department recognizes that some businesses pay significantly larger bonuses; where larger bonuses are paid, however, the amount attributable toward the EAP standard salary level is capped at 10 percent of the required salary amount.

For employers to credit nondiscretionary bonuses and incentive payments (including commissions) toward a portion of the standard salary level test, such payments must be paid on an annual or more frequent basis.

Q. May employers make a catch-up payment in the event that an employee doesn’t receive enough in nondiscretionary bonuses and incentive payments (including commissions) in a given year to remain exempt?

Yes, if an employee does not earn enough in nondiscretionary bonuses and incentive payments (including commissions) in a given 52-week period to retain his or her exempt status, the Department permits a “catch-up” payment at the end of the 52-week period. The employer has one pay period to make up for the shortfall (up to 10 percent of the standard salary level for the preceding 52-week period). Any such catch-up payment will count only toward the prior 52-week period’s salary amount and not toward the salary amount in the 52-week period in which it was paid. If the employer chooses not to make the catch-up payment, the employee would be entitled to overtime pay for any overtime hours worked during the previous 52-week period.

Q. When will these changes take effect?

The effective date of this final rule is January 1, 2020.

Q. What Should Employers Do Now?

The DOL estimates that approximately 1.3 million additional workers will now be eligible for overtime under this new rule.  Over the remainder of the year, employer should strongly consider taking the following steps:

  1. Identify employees who will need to be reclassified, i.e. current employees who are currently exempt but are paid less than $35,568 annually.
  2. Analyze the financial impact of either raising pay to the new threshold level, reclassifying the position as non-exempt and paying overtime, or lowering hourly pay to offset the overtime requirements.
  3. Review job descriptions and tasks to ensure that your employees are properly classified.
  4. Consider how pay changes or other changes in job assignments may impact your business.
  5. Consult with your employment attorney to ensure compliance and help maneuver your business through the DOL regulations and classification changes. 

We’ve highlighted the core of the final rule. For a list of complete FAQs, please go to the US Department of Labor website https://www.dol.gov/agencies/whd/overtime/2019/overtime_FAQ#20

During the briefing, the USDOL Community Outreach and Planning Specialist indicates that the DOL typically goes back two years when reviewing employers compliance with the overtime rule unless it finds employer willfully neglect compliance, in which case, DOL will go back three years. In addition, DOL investigators focus more on substance of the job duties rather than form and investigators typically interview employees to gain an understanding of their job duties.

CFO Connections is ready to help you determine the cash flows impact as a result of this final rule. Contact us for further discussion.

By CFOconnections

The Many Benefits of a Budget That Sets You Up for Success

As 2019 comes to a close, it is important to take a look at our progress and take steps to set ourselves up for future success. Creating a budget will help you see what the needs of your business will be in the coming year. Budget helps you track business expenses, and now much revenue you need to keep your business growing. By putting these numbers to paper, it helps you anticipate future needs, spending, profits, and therefore providing your business with a roadmap to understand where you are going with your business. It also may let you spot problems before they mushroom, so that you can switch gears.

Budget also gives you insight into how your business is performing from year to year, reveals savings opportunities that can improve performance and helps you anticipate the needed funds to purchase new equipment. It’s like being in a car without a map or GPS system. You hope you are going in the right direction, but you don’t know.

There are other reasons why a budget is important to a business. Bankers may want to see a budget when you ask for a loan. Investors may want to know how you spend your money and how you plan on growing your business before investing. Some business owners also believe that employees should also be privy to the budget so that they understand where the business is going and are motivated to work harder. They believe that business’s goal is a group goal and they can’t expect their staff to meet the business’s goal if they don’t know what they are.

Budget can also help you minimize risk to your business. If you have plans to sign a new lease or invest in new machinery or equipment, it’s better to find out whether you have the funds to commit to the new office space or the new equipment before you commit. A budget can be used to shed light on the funds needed for labor and/or materials, total start-up costs for a new business, your costs of operations, the revenues necessary to support the business and a realistic estimate of expected profits.

Once a budget is developed, it is important to use it to track actual expenditures and revenues each month so that you know whether you’re on target. If you’re missing the targets set out in your budget, you can use the budget to troubleshoot by figuring out how you can reduce expenses, increase sales by more aggressive marketing, or lowering your profit expectations.

A budget allows you to plan and adjust. It allows you to evaluate whether you can afford to hire that superstar, or to seize that attractive opportunity that could open up your business to a whole new world. Without a budget, it’s like shooting in the dark – you hope you are shooting straight but you don’t. Contact us to schedule a complimentary consultation.

By CFOconnections

Hurricane may be a natural disaster, your accounting doesn’t have to be

Hurricane Dorian was the most powerful tropical cyclone on record to strike the Bahamas, and is regarded as the worst natural disaster in the country’s history. It was the fourth named storm, second hurricane, and the first major hurricane of the 2019 Atlantic hurricane season.  Damage in the Bahamas was catastrophic due to the prolonged and intense storm conditions, including heavy rainfall, high winds and storm surge. Dorian is by far the costliest disaster in Bahamian history, estimated to have left behind an exceptional $7 billion in property damage. Hurricane Dorian then skirted up the Southeastern United States and eventually made landfall in Cape Hatteras, North Carolina.

Insured losses from Hurricane Dorian to the US will be between $500 million and $1.5 billion, according to estimates by risk-modeling and analytics. The estimate reflects property damage and business interruption to residential, commercial, industrial and automobile lines of business. Companies that have operations, significant customers, vendors, and employees in the Caribbean or the Southeastern United States could have their operations significantly interrupted and may have additional accounting considerations as a result of the disaster.

Here are some of the accounting and financial reporting implications of these events.

Financial Statement Reporting and Disclosure Considerations

Companies that incurred losses may need to expand its footnote disclosure to discuss circumstances surrounding the losses, any insurance claims made and any expected insurance reimbursements. Any uncertainties related to the claims should also be disclosed. These considerations are especially important for publicly traded companies since the SEC has in the past asked registrants to expand disclosure to discuss the effect of natural disasters on their operations quantitatively and qualitatively, such as loss of a major supplier or customer.

Assets Impairment Considerations

Were assets damaged or destroyed as a result of the hurricanes? The most commonly affected assets after a natural disaster are fixed assets, inventories and accounts receivable. Writing off these assets may be necessary if they are destroyed.

How about the projected cash flows from certain assets? Are they negatively affected? Companies should consider writing down assets that were damaged and revisit their estimated useful lives.

Loans and Banking Considerations

Financial institutions, especially those that have a substantial amount of loans in the affected areas, should consider the need to increase their allowance for loan losses. In the immediate aftermath of Hurricanes Harvey and Irma, a number of financial institutions waived late fees and extended payment deadlines to their customers. Therefore, special considerations should be given to disclosing loss of revenues.

On the other hand, companies may need additional financing or amend the terms of their existing credit agreements with banks to increase its borrowing capacity. Companies should evaluate whether the amendments represent modification of existing debts, or extinguishment of the existing debts and commencement of new arrangements.

As a result of the negative impact the hurricanes had on companies’ operations, companies may be in violation of their loan covenants – assets as collaterals destroyed or financial covenants not in compliance. This may trigger default and affect the classification of the debt on the balance sheet.

Accounts Receivable and Revenue Recognition

Companies that do businesses with those in the affected areas should consider collectability, write offs or reserve against the receivables. Companies that allow extended payment terms to the affected businesses should consider its effect on revenue recognition (Topic 606) since revenue can only be recognized when collection is probable.

Idle Capacity

Companies may experience below normal production level as a result of power interruption or fuel shortage. When assets are temporarily idle, depreciation should continue. On the contrary, depreciation should discontinue when assets are permanently unproductive.

Insurance

To properly manage the risk losses from natural disasters, companies have insurance policies to cover property, casualty and business interruption claims. When companies believe that reimbursement from insurance is probable, the companies should recognize a receivable for the amount expected to be recovered. However, the amount recorded cannot be greater than the recorded losses. If companies expect to be reimbursed for an amount greater than its recorded losses, the different should be treated as a gain contingency, i.e. recognized only when realized.

For companies that filed claims under their business interruption policies, they would also follow the accounting for gain contingency, i.e. recognized only when realized.

The classification of insurance proceeds in the income statement depends on the nature of the claims. Proceeds should be recorded in the income statement once the gain contingency is resolved. There are not guidance provided for many different types of claims and therefore judgement should be applied.

Insurance proceeds should be presented in the statement of cash flows based on the nature of the item insured. If the proceeds are for damaged fixed assets, it would be an investing cash flow. If the proceeds are for business interruption, it would be an operating cash flow.

Tax Considerations

Since profitability is negatively affected, companies should evaluate whether deferred tax assets are “more likely than not” that they would be realized and whether a valuation allowance is necessary.

By CFOconnections

5 Key Financial Challenges Facing Entrepreneurs on Exit

Nearly 75% of entrepreneurs will exit their businesses in 10 years.

Small business owners dedicate most of their life to their business. In many ways, it’s like their baby. They put all their savings and energy into it for years on end so it can thrive and truly succeed. They experience their share of ups and downs, but press ahead because they believe in the business and want it to grow.

But what happens when it comes time to hand over their business and let someone else take care of what they built with their sweat and tears? Doing so means accepting that they no longer make key decisions for its future. So, while they are still in the driver seat, what are some of the key financial and non-financial challenges they should be thinking about and planning ahead for?

1.Wealth preservation – Because the business owner’s wealth is concentrated on one company, business owner needs to think about the lifestyle he desires to have after exit through preserving wealth. A business owner should run an analysis on cash flows needed after exit in order to maintain current lifestyle to determine the amount of proceeds to be received when the business is sold.

2. Tax mitigation – this should be part of a strategy in exit planning since it will have a big impact on the amount of proceeds ultimately enjoyed by the business owner. A business owner looking to sell their business should consult tax professionals when planning for exit to minimize tax impact and maximize after tax cash flows.

3. Asset protection – after the business is sold, a business owner is on the radar and more exposed to a lot of people and could lead to potential frivolous litigations. Business owners need to work with professionals who can help them protect the cash flows in order to preserve wealth after exit.

4. Wealth transfer – A business owner needs to think about how to ultimately get the proceeds to family. This will be part of the estate planning process that is crucial for same or next generation wealth transfer.

5. Charitable intent – Most business owners want to fill the void that is left behind after selling their businesses and they often turn to philanthropy effort to make a difference in their communities.

How soon should a business owner start preparing to sell his business?

1.Time frame for exit planning – if you ask M&A professionals and business brokers, they would tell you yesterday is the perfect timing! Business owners who are heavy on operating the business often complain that they have no time to plan. With the strong market that we have currently, business owners could expect to sell their business in six months if they are willing to move quickly and aggressively towards their end goals. However, for proper planning for the challenges lie ahead – like the ones described – the recommended time frame is two to three years prior to exit to allow sufficient time to get personal affairs and business planning in order. Business owners often underestimate the amount of details that potential buyers will want to look at. Therefore, properly planning for exit will allow a business owner to focus on preparing for the potential buyers’ request for information. If you fail to plan, that often means you plan to fail.

2. Maximizing value – CPAs should advice clients reading for a liquidity event to get their financial statements in tip top shape; perhaps there has been some personal expenses running through the business that can be cleaned up or avoided? clean financials; what should we do now to get financials in order to achieve max value; what expenses are driving in the business now that shouldn’t be driving right now if we are planning for exit; how close can we get to accrual/GAAP basis?;

Other nonfinancial concerns

1.Filling that void after the exit – having your own business is very consuming of your life and it becomes a big part of you and your life. After a business owner sells his business, there is often a void, and something needs to fill that void since the life purpose isn’t there anymore. Business owners need to think about what they would like to do when they are no longer working and find new purpose in life.

2. Coordinate (quarterback) the process – A good advisor should be gathering a team to help a business owner build an exit strategy, and coordinating everything from A to Z. A good quarterback does not have to be an expert on taxes, financial reporting, estate planning, and business planning, all at the same time. Rather, a good quarterback must be a great communicator and be able to understand the emotions a business owner is going through during the process, and to pull together a team of other experts who have the best interest of the business interest at heart. CPAs typically have a knack in understanding the capabilities of other professionals.  They are typically conservative and level-headed, and often compliment the high energy of business owners.

Do you have an advisor you can count on when you are ready to move to the next stage of your life?

By CFOconnections

New Lease Accounting Standard – Taking a Cue from Adoption by Public Companies

ASC Topic 842 is the culmination of a decade-long, joint project with the FASB’s international counterpart, the International Accounting Standards Board (IASB). The IASB released its standard on lease accounting, IFRS 16, Leases, on January 12, 2016. As the standard was being drafted, it sent shock waves through the accounting profession because of its potential significant impact on companies’ financial statements. The new standard requires lessees to recognize a right-of-use asset and a corresponding liability on the financial statements for almost all of their leases. Not only does the adoption requires companies to allocate resources to evaluate its existing leases and their accounting, it also has significant impact on companies with loan covenants. Immediately, CPAs received questions from Controllers and CFOs ranging from evaluation of existing leases, its implementation, the technical accounting calculation of the right-of-use asset and corresponding liability, how to structure future leases to ease adoption, and guidance on having a dialogue with bankers on the potential impact on covenant compliance.

Public companies have already adopted the standard effective January 1, 2019 and we have seen quite a diversity of lease structures and their impact on the financial statements. Private companies have another year to prepare for the adoption on January 1, 2020. Let’s take a look at what we learned.

Transition Methods

Companies can elect to apply the new lease accounting standard in one of two ways:

Method A – applied retroactively to each prior reporting period presented in the financial statements with a cumulative-effect adjustment recognized as the beginning of the earliest period presented; or

Method B – applied retrospectively to the beginning of the period of adoption through a cumulative-effect adjustment recognized as of the beginning of that period.

As you can imagine, given the difficulty in retrospectively applying the standard, even on a modified retrospective basis, most companies chose Method B.

Practical Expedients

As expected, most companies also elected certain practical expedients when applying the standard in order to gain efficiency. These practical expedients must be chosen as a package, and they allow companies to not reassess the prior conclusions under the old lease accounting standard regarding the followings:

  1. Whether a pre-existing contract is or contains a lease

2. Whether a pre-existing lease should be classified as an operating or finance lease

3. Whether the initial direct costs capitalized for a pre-existing lease under the old standard qualify for capitalization

It is important to note the these practical expedients cannot be used by companies to grandfather errors in the application of the old standard.

Hindsight Practical Expedient

Companies are allowed to make an election to use hindsight when determining lease term and impairment of the right-of-use asset. This practical expedient may be elected separately or in conjunction with the package of practical expedients mentioned above. Companies must apply the hindsight practical expedient to all pre-existing leases or apply it to none of them. If companies elect this practical expedient, they should consider all facts and circumstances that have changed through the adoption date. If companies do not elect this practical expedient, they should determine the lease term and impairment of the right-of-use asset based on facts and circumstances in existence when those determinations were otherwise made.

Electing this practical expedient could lead to a change in lease term, which may or may not be a desirable outcome. This may require more effort in initially measuring the lease liability and the right-of-use asset than if the lease term does not change or when not electing the hindsight practical expedient. Companies should carefully consider the effects of electing this practical expedient by determining whether those effects are worth the additional effort.

Land Easement Practical Expedient

A land easement is also known as a right of way that provides the lessee with the right to use, access or cross another entity’s land for a specified purpose. When companies elect the land easement practical expedient, they are allowed to not assess whether pre-existing or expired land easements that were not previously accounted for as leases under the old standard are or contain a lease under new standard. Only those pre-existing or expired land easements entered into on or after the adoption date are considered. The land easement practical expedient may be elected separately or in conjunction with either or both the package of practical expedients and (or) the hindsight practical expedient. Companies must apply the land easement practical expedient to all preexisting land easements or apply it to none of them.

We saw that most companies elected the land easement practical expedient because they have not typically identified land easements as leases in the past and the difficulties that would arise in assessing whether pre-existing or expired land easements are or contain a lease under the old standard.

Related Party Leases

The new lease accounting standard requires companies to account for related party leases on the basis of legally enforceable terms and conditions of the lease. This means that off-market terms should not be adjusted when determining the proper accounting for the transaction but the detail of the related party transaction would need to be disclosed.

Companies should also look beyond the stated terms of the lease and consider all facts and circumstances when evaluating related party leases and the initial measurement of the right-of-use asset and its corresponding liability. Companies may find themselves having to estimate future cash flows when measuring the initial right-of-use asset and the corresponding liability. Companies also should use judgement in determining lease term and consider asset and entity specific factors when evaluating related party leases under the new standard.

Disclosure

Don’t underestimate the effort required to comply with the disclosure requirements in the new standard. The new standard spells out the required qualitative and quantitative information that needs to be disclosed but doesn’t offer much guidance in terms of the manner of its presentation. As a result, we are seeing a diverse practice in how companies present the required information.

Qualitative information required to be disclosed includes, but not limited to, description of the lease, information about leases that have not commenced but have significant rights and obligations for the companies, information about significant judgements and assumptions made in accounting for the lease, and whether an accounting policy was made for short-term lease exemption.

Quantitative information required to be disclosed include, but not limited to, lease expense for finance and operating leases, right-of-use assets obtained in exchange for lease liabilities for finance and operating leases; weighted average remaining lease term for finance and operating leases; weighted average discount rate for finance and operating leases, etc.

Adopting any new accounting standard shouldn’t take away resources from companies from carrying out their most important mission – growing and making an impact in their communities. We can help you navigate through the new accounting standard by helping you evaluate whether this standard applies to you, and if so, determining lease classification, how to treat non-lease components, determine lease term and other variables that go into the initial measurement of the right-of-use asset and its corresponding liability, how to handle lease modifications, lease incentives, related party leases and provide the necessary information required to be disclosed. Keep Calm and Contact Us.