& Al Duhaime, Audit Principal Jeff Wheeler, Audit

TODAY’S AGENDA<br>

OTHER 2019 CALENDAR YEAR-END UPDATES – NONPUBLIC ENTITIES<br>

OTHER 2019 CALENDAR YEAR-END UPDATES – NONPUBLIC ENTITIES<br>

STEPS TO TAKE IN THIS CHANGING ENVIRONMENT Identify responsible parties to oversee implementation of these complex pronouncements
Set appropriate goals, timetables, accountability, and track progress towards implementation
Evaluate IT Systems and resources to ensure they meet the requirements to capture, track, summarize, and report the data needed to account and report under these standards
Involve external advisors and professionals early
Have good up-front communication with lenders and other users of your financial statements<br>

REVENUE FROM CONTRACTS WITH CUSTOMERS (TOPIC 606) Effective for non-public fiscal years beginning after December 15, 2018 (calendar 2019)
The core premise is that an entity should recognize the amount of revenue it expects to be entitled to for the transfer of promised goods or services to customers.<br>

LESSONS LEARNED FROM PUBLIC COMPANIES<br>

REVENUE RECOGNITION - WHAT SHOULD YOU BE DOING NOW Ensure records and files containing customer contracts and specifics on terms of product and service sales are accurate and complete
Review standard contracts to fully understand the nuances of your product and service deliverables
Consider the impact of other items impacted by the new pronouncement, such as contract acquisition costs, setup costs, fulfillment, and sales commissions
Decide on an adoption approach<br>

REVENUE RECOGNITION – FROM RULES BASED TO PRINCIPLES BASED Old rules were very specific, and industry focused
New rules are principles based, and require more evaluation, judgement, and estimation
Examples include contract duration (especially with termination provisions), renewals, variable consideration provisions, and allocation of transaction price to each performance obligation based on stand-alone selling prices<br>

STEP ONE: IDENTIFY CONTRACT(S) A contract is defined in ASC 606 as an agreement between two or more parties that creates enforceable rights and obligations
Enforceability of rights and obligations in a contract is a matter of law
Contracts can be written, oral or implied by an entity’s customary business practices
Practices and processes for establishing contracts may vary within a business
Companies have to consider processes and practices when determining whether an agreement creates enforceable rights and obligations<br>

STEP ONE: IDENTIFY CONTRACT(S) Arrangement must meet all these criteria to be a contract further evaluated for revenue recognition under the overall model in ASC 606:
Parties have approved the contract and are committed to perform
The Company can identify each party’s rights regarding the goods or services to be transferred
The contract’s payment terms can be identified
Contract has commercial substance
It is probable that the Company will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectability is probable, an entity shall consider only the customer’s ability and intention to pay that amount when it is due<br>

STEP TWO: IDENTIFY THE PERFORMANCE OBLIGATIONS IN THE CONTRACT Definition of performance obligation
At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either:
A good or service (or a bundle of goods or services) that is distinct
A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.<br>

STEP TWO: TWO DISTINCT CRITERIA Are promised goods or services distinct from other goods and services in the contract?
To be distinct, a promised good or service must meet the following two criteria:
It must be capable of being distinct
It must be separable from other promises in the contract
Is the contract to deliver multiple promised goods or services or
a combined item(s) that comprises the individual goods or services promised in the contract (may require significant judgement)<br>

STEP THREE: DETERMINE THE TRANSACTION PRICE Transaction price is the amount of consideration a party in the contract expects to be entitled to
Be on the lookout for:
Variable consideration
Non-cash consideration
Consideration payable to the customer (for example coupons, vouchers) that can be applied against amounts owed
Loyalty or Rewards Programs
Volume discounts
A contract’s enforceable rights and obligations at inception influence whether it includes customer options or variable consideration<br>

STEP FOUR: ALLOCATE THE TRANSACTION PRICE TO THE PERFORMANCE OBLIGATIONS IN THE CONTRACT Allocate the transaction price to each performance obligation on the basis of its stand-alone selling price
Allocate discounts proportionally to all performance obligations<br>

STEP FIVE: RECOGNIZE REVENUE WHEN (OR AS) THE ENTITY SATISFIES A PERFORMANCE OBLIGATION A performance obligation is satisfied when a customer obtains control of the good or service
Control is “the ability to direct the use of, and obtain substantially all of the remaining benefits from the asset”
Control can transfer over time, or at a point in time<br>

RECOGNITION OF REVENUE AND TRACKING PROGRESS Measuring Progress – use a method that best depicts the transfer of goods or services (output and input methods)
If unable to reasonably recognize progress, recognize revenues to the extent of costs incurred
A change from prior rules – for industries like construction, completed contract method is no longer allowed
Indicators that control has transferred
You have a present right to payment
Customer has taken legal title to an asset
Physical possession of an asset has transferred
Customer has significant risks and rewards of ownership
Customer has accepted the asset (however acceptance clauses may be an informality)
If you sell with trial / evaluation periods, control does not transfer until customer acceptance<br>

REVENUE RECOGNITION – THINGS TO WATCH OUT FOR Contract modifications
Warranties (could be a separate performance obligation or cost accrual)
Rights of return (not a separate performance obligation, but gives rise to variable consideration, and requires recognition of estimated refund liabilities and assets for expected product returns upon sale)
Costs to obtain a contract (old GAAP, expensed as incurred ; new rules recognize as an asset if you are expected to recover them)<br>

TOPIC 606 - METHODS OF ADOPTION<br>

TOPIC 842 - LEASE ACCOUNTING CHANGE<br>

LEASE ACCOUNTING KEY CHANGES Moves the measurement and disclosure of operating leases from the footnotes of GAAP Financial Statements to the balance sheet as assets and liabilities.
Now two lease types:
Finance – Similar to capital leases
Operating – Similar to the prior concept of operating leases<br>

LEASES – WHAT TO BE DOING NOW<br>

LEASES – PREPARE FOR:<br>

KEY CONCEPTS - LEASING<br>

ACCOUNTING FOR THE LEASE Recognition of long-term leases as assets and liabilities
Lease payment liability
Right to use asset
Measurements include (if reasonably certain)
Options to extend
Options to purchase
Operating leases – cash payments as operating activities
Finance Leases – cash payments as financing activities
Initial direct costs are included in the lease payments and capitalized
Discount rates can be:
Rate implicit in the lease unless the rate cannot be easily determined or
An incremental borrowing rate or
Private companies can make an accounting policy election to use a risk-free discount rate for the lease<br>

SHORT-TERM LEASES Lessees can make a measurement exception accounting policy election for short-term leases with a term of 12 months or less that does not contain an option to purchase the underlying asset that the lessee is reasonably certain to exercise.<br>

ASU 2016-18: CASH FLOWS AND RESTRICTED CASH These amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.
The amendments do not provide a definition of restricted cash or restricted cash equivalents.<br>

FINANCIAL INSTRUMENTS – RECOGNITION AND MEASUREMENT The amendments change disclosure requirements, and requires among other things:<br>

DEFINED BENEFIT PLANS– CHANGES TO DISCLOSURE REQUIREMENTS Improve the effectiveness of pension note disclosures for sponsors of defined benefit pension plans, and removes the requirements to:<br>

DEFINED BENEFIT PLANS– CHANGES TO DISCLOSURE REQUIREMENTS Adds requirements to disclose:<br>

OTHER FUTURE ITEMS TO BE AWARE OF<br>

REGULATORY - SALES TAXES AND THE WAYFAIR DECISION For many years, the Quill decision limited states’ ability to tax sales made to customers in their states by out-of-state companies.

In 2018, the US Supreme Court eliminated the physical presence requirement for states to require businesses to collect and remit state sales tax, and established economic nexus as the sales tax nexus standard.

This means there is a responsibility for businesses to collect and remit sales taxes properly and in accordance with state and local jurisdiction laws (10,000 different jurisdictions in the U.S. each with different rates, rules, and regulations).<br>

SALES TAX EXPOSURES – STEPS TO TAKE<br>

OTHER AUDITING AND REPORTING<br>

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Baker Newman Noyes professionals are specialists with focused skills and experience ready to assist clients with the latest industry knowledge and techniques. Our assurance practice offers a wide range of services to clients, such as:









Our responsive client service approach stresses frequent communication. Our goal is to add value to your business through a combination of technical skills and expertise, personal attention, and an understanding of your evolving needs. Testing of internal controls and other compliance projects
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and compilations
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RISK AND BUSINESS ADVISORY SERVICES As businesses look for ways to maximize opportunities within the increasingly competitive marketplace, questions often arise as to how to effectively do this while aligning the right business strategy for optimum growth.
This alignment of an organization’s operational and technological investments with its business goals is critical. From high-level issues involving strategic decisions and controls and project management, to operational details concerning information security, our risk and business advisory practice can help you align your objectives with your overall business plan. Business Advisory Services
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FEDERAL, STATE AND LOCAL TAX Businesses today often conduct activities in multiple states, resulting in complex and burdensome tax filing requirements. BNN’s state and local tax professionals collaborate across specialties to provide you with a local touch for all of your multi-state tax issues.
Our professionals have varied skill sets including government, corporate, and national accounting firm experience. In addition, our active membership in Baker Tilly International, a network of firms around the U.S. and the world, gives us access to additional local resources as needed. The result is responsive, needs-based solutions for our clients. PE and State Tax Nexus Review, and Voluntary Disclosure
Review business activities and determine sales, income, and franchise tax compliance requirements
Review returns and identify refund opportunities
Quantify tax exposure and evaluate options
Pursue voluntary disclosure and other options to begin compliance under the most favorable terms
Tax Compliance and Planning
Preparation of federal and state income tax returns
Provide guidance related to the tax treatment of “cloud computing” transaction
Economical, full-service tax support, including preparation and review of returns
Suggest improvements gained by alternative filings and/or corrections
Recommend changes based on organizational needs
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Sales and Use Tax
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Review and analysis of tax consequences of transactions and operational changes
Recommend innovative methods of reviewing compliance and minimizing exposure
Training for purchasing and accounts payable employees Merger and Acquisition Services
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Tax minimization on sale transactions and post-transaction tax reduction consulting<br>

INTERNATIONAL TAX Baker Newman Noyes’ professionals direct and advise clients regarding international taxation and business matters allowing them to negotiate challenges in the global marketplace and take advantage of tax planning opportunities. WE CAN HELP YOU WITH: Business entity selection and structuring
Transfer pricing planning and studies
Subpart F income determinations
Foreign tax reduction and credit planning
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Repatriation tax consequences
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Foreign tax withholding obligations
Foreign investment in U.S. real property
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Foreign persons working in the U.S. U.S. employees working abroad
Export incentives including IC-DISC appropriateness
Earnings stripping limitation calculations and other interest rules
Comprehensive services for individuals including expatriates and foreign nationals
U.S. withholding tax obligations on payments to foreign businesses and persons
Planning for international transaction taxes such as VAT, GST and HST
Compliance for U.S. international tax reporting for IRS Forms 5471, 5472, 8858, 8865, 926<br>

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