- 1. A Global Reach with a Local Perspective www.decosimo.com
Accounting Oopsies Accounting Topics That Can Trip You Up &
Cause You To Go Oops! Jennifer Goodman, CPA, CGMA | Assurance
Principal
2. Sometimes its not what you see, but what you dont see on the
books and records! Life insurance policies Compensated absences,
postemployment benefits and bonuses Stock compensation Legal Fees
General Accruals Capitalization Minimums FOB Destination vs
Shipping Deferred Tax Calculations Accounting Oopsies 3. Accounting
Oopsie Sometimes its not what you see but what you dont see on the
books and records Life Insurance Policies Comp Absences,
Postemployment Benefits and Bonus Agreements Stock Awards 4. The
amount that could be realized under the insurance contract as of
the date of the statement of financial position should be reported
as an asset. The change in cash surrender or contract value during
the period is an adjustment of premiums paid in determining the
expense or income to be recognized under the contract for the
period. Determine who owns the policy NFP industry Many of you are
on boards of NFP entities. Bring this up at the next board meeting.
Accounting for key man life insurance 5. ASC 710 Compensation a
liability should be accrued for compensation if all of the
following: Obligation attributable to services already rendered
Rights vest or accumulate Vest obligation to pay even if employee
terminated Accumulate rights may be carried forward Modification
rule for sick pay where accrual not required but permitted if
rights accumulate but do not vest Payment is probable, and Amount
can be estimated Compensated Absences 6. Example Suzanne has earned
but not used 5 days of vacation and 5 days of sick pay at 12/31/13.
Policy: Vacation and sick days accumulate but will not be paid if
employment is terminated. An employee can only use sick days due to
illness. Should vacation and sick pay be accrued at 12/31/13? What
if new employees have to wait until second year of employment to
take vacation? Accrue at current salary rates or salary rates
expected at time vacation is actually paid? Compensated Absences
Example 7. ASC 712 Compensation nonretirement postemployment
benefits (ex: severance, salary continuation, layoff benefits,
health care, and training). Recognize the obligation if all of the
following: Obligation attributable to services already rendered
Rights vest or accumulate Payment is probable, and Amount can be
estimated Postemployment Benefits 8. Benefits accumulate if it
increases with service (not salary) Determine to accrue ratably
during the active service period or accrued in lump at termination.
Answer: Does obligation related to employees services already
rendered? Only accrue at point in time earned to date Does
obligation relate to rights that vest or accumulate? No - Dont need
to accrue before employee termination event Yes Is payment probable
and can it be estimated? If yes, accrue ratably during employees
active service period Postemployment Benefits Accruing 9.
Compensation based attaining a goal over period of time should be
accrued over a period of time in relation to results achieved.
Example Suzanne gets bonus equal to 10% of her sales for the year
over $800,000. Company expects Suzannes sales to be $1M i.e.
projected bonus $20k What is the accrual at March 31 for $250,000
in actual sales? Bonuses not based on formulas should also be
accrued ratably if it is probable they will be paid. Postemployment
Benefits Bonuses 10. ASC 718s measurement objective Determine the
fair value of stock-based compensation at the grant date assuming
that employees fulfill the awards vesting conditions and will
retain the award. The fair value of an award Reflect the estimated
value that the company would be obligated to provide when an
employee is entitled to the award and is no longer required to
provide service to the employer. Postemployment Benefits Stock
Awards 11. The fair value of stock-based compensation is measured
on the grant date. The following criteria should be satisfied to
establish a grant date: A mutual understanding of the awards key
terms and conditions The company is contingently obligated to issue
shares or transfer assets to employees who fulfill vesting
conditions. An employee begins to benefit from, or be adversely
affected by, subsequent changes in the employers stock price Awards
are approved by the board of directors, management, or both if such
approvals are required, unless perfunctory. The recipient should
meet the definition of an employee (i.e., grant date cannot be
established prior to first day of employment) if the award is for
employee service. See employment agreement example Postemployment
Benefits Stock Awards 12. Accounting Oopsie Accounting for Legal
Fees Capitalize, Expense or Accrue? 13. Acquisition related costs
805-10-25 (finders fees, advisory, legal, accounting, valuation,
and other professional or consulting fees) General rule - expense
acquisition fees Exception registering and issuing debt securities
Capitalize and amortize Exception registering and issuing equity
securities Paid in capital Accounting for Legal Fees Business
Combinations 14. Accounting for Legal Fees - Business Combination
Footnote Consideration $1,949,000 Identifiable Assets Acquired:
Inventories $ 170,000 Machinery and equipment $1,109,000 Other
intangibles $595,000 Total identifiable assets $1,874,000 Goodwill
$75,000 $1,949,000 Legal fees expensed in operations $ 157,000 15.
Debt treatment Fees b/t borrower/lender Cost incurred with third
parties Unamortized cost of old loan Extinguishment Accounting
Expensed Capitalized Written off Modification Accounting Reflected
in debt premium or discount Expensed Leave on books and continue to
amortize Accounting for Legal Fees Debt Modifications and Debt
Extinguishments 16. You pick your policy! Select an accounting
policy that provides for either the inclusion or exclusion of
estimated legal fees Consistently apply such a policy If policy is
to include legal fees as part of loss contingency accrual Costs
should be accrued even when the related loss is not accrued
Accounting for Legal Fees Loss Contingencies 17. Accounting Oopsie
Timing on When to Record Accruals 18. A liability has three
essential characteristics: it embodies a present duty or
responsibility to one or more other entities that entails
settlement at a specified or determinable date, on occurrence of a
specified event, or on demand the duty obligates a particular
entity, leaving it little or no discretion to avoid the future
sacrifice, and the transaction or other event obligating the entity
has already happened Recording Accruals General Definition 19. A
CPA has been engaged to audit the financial statements for the year
ended 12/31/2013. Is it proper to accrue the fee as an expense in
2013? Recording Accruals Example #1 20. Mgmt. has committed to shut
down plant Line 3 and the line is not operating as of 12/31/13.
Half of the equipment will be relocated to plant Line 2 and half of
the equipment is currently up for sale for 50,000. The lessor was
notified of bldg. lease termination by year end. Mgmt. has
identified the following costs associated with the shut down: NBV
of equipment $ 1,000,000 One-time termination benefits paid in 2014
$ 50,000 Remaining bldg. lease pits due in 2014 do not plan to
sublease forgoing 40,000 $ 100,000 Estimated equipment
relocation/set-up cost $ 200,000 Estimated general cost for shut
down $ 75,000 What losses/impairments should be accrued at
12/31/13? Recording Accruals Example #2 21. Property held for sale
(half of 1,000,000 less FMV) $ 450,000 One-time termination
benefits paid in 2014 Assumes employees have been identified, there
is an expected completion date and employees were informed $ 50,000
Lease (100,000 less sublease value 40,000) $ 60,000 Cannot accrue
for relocation costs or general accruals. Commitment to an exit or
disposal plan by management does not, by itself, result in the
incurrence of a liability. Exit and Disposal Cost Obligations can
be tricky! ASC 450 Recording Accruals Example #2 22. Accounting
Oopsie Fixed Asset Capitalization Policies and Capitalization
Minimums 23. For expediency, many entities adopt policies
specifying the minimum cost that a property unit must have before
it is capitalized. These policies are acceptable as long as the
minimum is reasonable and, where necessary, exceptions are made to
recognize that such policies are merely conventions. Fixed Asset
Capitalization Policies 24. Entity has annual sales of $2.5M Net
income is $300k Total PPE NBV is $4M Capitalization policy is all
tangible property with a useful life over 1 year is capitalized if
purchase price is over $5k. Is this policy reasonable? Fixed Asset
Capitalization Policies - Example 25. Capitalization policy is
tangible property with a useful life over 1 year is capitalized if
purchase price is over $5k. Entity purchases a nice executive chair
for CFO for $4,999. The $4,999 chair is expensed. Entity purchases
100 chairs for training facility at $500 per chair. This $50,000
purchase is expensed. Entity remodels CFOs office and purchases a
desk for $4,000, matching credenza $2,500, matching custom file
cabinets $3,000, chair $4,999 and installation cost of $501. This
$15,000 purchase is expensed. Did the entity properly account for
the furniture? Fixed Asset Capitalization Policies - Example 26.
Accounting Oopsie FOB shipping vs destination 27. FOB terms are an
important consideration in product sales, because they determine
the point at which title to the product, and thus the risks and
rewards of ownership, has legally passed to the buyer. FOB
destination indicates that title to the product passes upon
delivery to the customer. FOB shipping point indicates that title
to the product passes at the time of shipment. FOB shipping point
vs destination 28. FOB terms are an important consideration in
product sales, because they determine the point at which title to
the product, and thus the risks and rewards of ownership, has
legally passed to the buyer. FOB destination indicates that title
to the product passes upon delivery to the customer. Revenue
recorded when it reaches customer FOB shipping point indicates that
title to the product passes at the time of shipment. Revenue
recorded when it ships VERY IMPORTANT review your transportation
cost terms and associated agreements carefully but you must also
consider your implicit business practices FOB shipping point vs
destination 29. Products shipped FOB shipping point can generally
be considered delivered when the goods leave the sellers premises
because the risk of loss is transferred at shipment and the buyer
has the rewards of owning the product . Example: Product is sold
FOB shipping point as indicated on the invoice. However, for this
important customer, the seller has agreed to be responsible for
hiring and paying the shipping agent and insuring the goods in
transit. Can the seller recognize the sale upon shipment? FOB
shipping point vs destination 30. Products shipped FOB destination
are not considered to be delivered until the goods reach the
customer. Example: A third party shipping agent rather than the
seller has assumed the risk of physical loss on the products during
transit. Can the seller go ahead and recognize the sale since they
no longer have the risk of loss during transit? FOB shipping point
vs destination 31. The phrase synthetic FOB destination is used
when a vendor offers free-on-board (FOB) shipping point terms, but
also has a standard business practice of replacing goods that are
lost or damaged while in transit to the customer. Example: A
company has a implied (not written) policy of replacing lost or
damaged goods results. The contractual terms specifically state
that product is FOB shipping point. Can the Company recognize
revenue at the time of shipment? FOB shipping point vs destination
32. Accounting Oopsie Deferred Tax Calculations See deferred tax
example 33. Questions 34. JENNIFER GOODMAN, CPA, CGMA Assurance
Principal | [email protected] Jennifer Goodman is an
assurance principal with more than 15 years experience in public
accounting. Jennifer provides audit and assurance services,
including audits of internal control over financial reporting, to
privately held businesses, public companies, not-for-profit
organizations and manufacturing and distribution clients. She
contributes to the firms manufacturing and distribution team by
providing cost accounting expertise, insights into best practices
and specialized advice regarding internal control issues. Her
experience also includes financial statement audits, audits of
internal control over financial reporting and limited scope
consulting engagements for foreign firms performing assurance
engagements for foreign SEC filers.
