How to keep track of small tools and equipment

Barcode with red light ray and binary code in background

Whether it’s hard hats and drills on a jobsite, iPads in an office or RFID readers in a warehouse, small tools and equipment have a tendency to disappear at many companies. The cost of lost, damaged and stolen items can quickly add up, consuming profits and cash flow. What can you do to manage these items more effectively and create accountability among workers?

Technology to the rescue

Electronic bar-code technology that’s used to track inventory can also be used to label, coordinate, trace and catalog fixed assets in real time. These systems usually involve bar codes displayed on polyurethane labels on each tool or machine. The labels are designed to hold up under repeated on-the-job wear and tear.

These systems come with handheld devices that you can use to scan the bar codes when assigning tools and accepting returns. Tracking software sends the pertinent information to a database that can also be used for browsing, billing and running reports. In addition, the program records repair histories and maintenance schedules.

The cost of bar-code technology varies, depending on the number of features included in the system configuration. How complex a system you’ll need will depend on the number of items you’re looking to track. But if you’re already using this technology to manage inventory, there may be economies of scale by choosing a system that can handle both types of assets.

Improving efficiency

Bar-code technology also has the power to improve management efficiency. How? You can let employees know that, if the system shows that the tools they’ve checked out haven’t been returned, the employee or the job they’re working on could be charged for the missing item. Thus, employees will more closely monitor and protect these items to avoid paying for lost items or having a project go over budget.

The right system may also reduce your legal liability. In some industries, federal regulations or union rules may require workers to wear safety gear, such as goggles, hard hats and respirators. A formal tracking system allows you to show that you issued employees the proper equipment, which could in turn limit your accident liability.

Creating accountability

To take bar-code tracking to the next level, integrate it into your accounting system. For example, you might assign tools by employee name, job code, project number, date, time, location or other criteria. Then you can generate a report of employees or projects where specific tools are being used.

In turn, you’ll foster an atmosphere of accountability by making managers and employees more responsible for these assets. There’s no better way to drive home a point about wasted assets or money than to sit down with employees and show them, in dollars and cents, how a tool is being misused.

Bottom line

Bar-code technology isn’t new, but it’s become more cost effective and robust. Even if you’ve been working with this technology for several years, it’s time to consider upgrades that you might have missed — or new vendors with tighter security measures or innovative features.

For help evaluating your current system or investing in a new one, contact your CPA. He or she has helped other companies implement this technology and knows industry best practices and potential pitfalls to avoid.

© 2019

Valuing Profits Interests in LLCs

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The use of so-called “profits interest” awards as a tool to attract and retain skilled workers has increased, as more companies are being structured as limited liability companies (LLCs), rather than as corporations. But accounting complexity has caused some private companies to shy away from these arrangements. Fortunately, relief from the Financial Accounting Standards Board (FASB) may be coming soon.

New twist on equity compensation

Corporations tend to award traditional stock options. But profits interests are used exclusively by LLCs. As the name suggests, these arrangements provide recipients with a share of the company’s future profits. Under existing U.S. Generally Accepted Accounting Principles (GAAP), these transactions may be classified as:

  • Share-based payments,
  • Profit-sharing,
  • Bonus arrangements, or
  • Deferred compensation.

The classification is determined by the specific terms and features of the profits interest. In most cases, the fair value of the award must be recorded as an income statement expense. Profits interest can also result in the recognition of a liability on the balance sheet and require footnote disclosures.

Need for simplification

Profits interest arrangements can accomplish a variety of business objectives. Though they’re most often awarded to employees, profits interests can also be given to investors, third-party service providers and other individuals.

These awards are usually issued in exchange for future services, without direct payment or financial investment. Various terms and features can be incorporated into a profits interest. For example, these awards often have contingency features, such as vesting requirements, participation thresholds, the occurrence of certain events, limited time periods, expiration dates and forfeiture provisions. In turn, this variability can cause additional complexity compared to other forms of equity compensation and require special valuation techniques.

“Profits interest continues to come up as an area private companies are struggling with,” said Candace Wright, Chair of the Private Company Council (PCC) during a meeting with the FASB earlier this year. Private companies have been clamoring for practical expedients and additional guidance from the FASB on such issues as acceptable valuation methods, audit techniques and disclosure requirements.

Work in progress

Simplification of the financial reporting guidance would be welcome news for employers, employees and other stakeholders. Contact us for help reporting these transactions under existing U.S. GAAP or for an update on the latest developments from the FASB.

© 2019

Nonprofits: New Alternatives for Reporting Goodwill and Other Intangibles

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Did you know that the Financial Accounting Standards Board (FASB) recently extended the simplified private-company accounting alternatives to not-for-profit organizations? Many merging nonprofits, including educational institutions and hospitals, welcome these practical expedients. Here are the details.

Alternative for goodwill

The first alternative accounting method allows for the amortization of goodwill on a straight-line basis over 10 years (or less if a shorter useful life is more appropriate). It applies only to:

  • Goodwill recognized in a business combination after initial recognition and measurement,
  • Amounts recognized as goodwill in applying the equity method of accounting, and
  • The excess reorganization value recognized by entities that adopt fresh-start reporting under U.S. Generally Accepted Accounting Principles (GAAP) for reorganizations.

Once an alternative has been elected, the organization must apply all the alternative’s subsequent measurement, derecognition, presentation and disclosure requirements to existing goodwill and all future additions to goodwill that fall within the scope of the accounting alternative.

Upon adoption of the accounting alternative, the organization must decide whether to test goodwill at either the entity level or the reporting unit level. However, annual impairment testing isn’t required under the alternative. Rather, testing for impairment is required only if a triggering event occurs that indicates that the fair value of the nonprofit entity (or the reporting unit) may be below its carrying amount.

Alternative for identifiable intangible assets

The second accounting alternative allows a nonprofit organization to bypass the separate recognition of noncompete agreements and customer-related intangible assets unless they can be sold or licensed independently from other assets of a business. In other words, such items would be considered part of goodwill. Nonprofits that elect this alternative would recognize fewer intangible assets in a business combination.

It applies to nonprofit organizations that are required to recognize or consider fair value of intangible assets when:

  • Applying the acquisition method for a business combination,
  • Evaluating the nature of a difference between an investment’s carrying amount and the underlying equity in the net asset of an investee when applying the equity method of accounting, or
  • Adopting fresh start accounting for reorganizations.

If an organization decides to elect the accounting alternative for accounting for identifiable intangible assets, it also must adopt the accounting alternative for goodwill. However, a nonprofit that elects to adopt the accounting alternative for goodwill isn’t required to adopt the accounting alternative for accounting for identifiable intangible assets.

Effective date and transition

Nonprofits can immediately elect to use these alternative reporting methods. If elected, the goodwill accounting alternative should be applied prospectively to all existing goodwill and for all new goodwill generated in acquisitions. And the alternative for accounting for identifiable intangible assets should be applied prospectively upon the occurrence of the first transaction within the scope of the alternative. Contact us for more information. Our accounting professionals can help determine if these alternatives are right for your organization.

© 2019

Internal Audit 2.0: Paperless and continuous Auditing Trends

Technology is altering the traditional approach to internal audits. Instead of reviewing reams of paperwork, today’s auditor is learning to use electronic records. In turn, going paperless facilitates a concept known as “continuous auditing,” where internal auditors continually gather data to support their procedures. Here’s how your business can modernize this process.

Targeting specific areas

Not every functional area of your company lends itself to paperless and continuous auditing. To determine whether sufficient, timely and accurate electronic data exists, you’ll need to review the systems that store and generate your company’s data.

For example, if a portion of your inventory accounting processes still relies on paper, it may not present an ideal candidate for paperless and continuous auditing. Alternatively, if your accounts payable (AP) process functions entirely on electronic records, it’s logical to include AP in the continuous audit program.

Planning the program

Before you can adopt a continuous audit program, you must determine:

  • Your primary and secondary business goals, and
  • The key risks you hope to mitigate.

Then you can design your program accordingly. For example, if you plan to continuously audit the AP process and you’re concerned about occupational fraud, you may decide to put a rule in place that looks for the creation of vendors whose address matches that of an employee.

From a practical perspective, it’s important to document how often you plan to sample the data that the continuous audit program makes available. Keep in mind that a daily review of the output often generates the greatest benefit.

Ensuring accountability

To help ensure accountability, a process must exist to review and evaluate the audit output. For example, if the review of employee payroll data uncovers unusual payroll disbursements, a process must exist to investigate those discrepancies.

The individual who should be responsible for reviewing the data will depend on the size and structure of your company. It could fall to the internal audit department, someone within the fraud team or a department manager.

Time for change?

Robust internal audits help management correct operational issues quickly, which prevents money from being wasted and risks from spiraling out of control. If implemented correctly, paperless and continuous auditing can improve your company’s internal audit and oversight abilities while also reducing its costs. Contact us for help converting paper records to an electronic format, as well as planning and implementing a continuous internal audit program that targets the optimal areas of your business operations.

© 2019

Measuring Fair Value for Financial Reporting

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Business assets are generally reported at the lower of cost or market value. Under this accounting principle, certain assets are reported at fair value, such as asset retirement obligations and derivatives.

Fair value also comes into play in M&A transactions. That is, if one company acquires another, the buyer must allocate the purchase price of the target company to its assets and liabilities. This allocation requires the valuation of identifiable intangible assets that weren’t on the target company’s balance sheet, such as brands, patents, customer lists and goodwill.

What is fair value?

Under U.S. Generally Accepted Accounting Principles (GAAP), fair value is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Though this term is similar to “fair market value,” which is defined in IRS Revenue Ruling 59-60, the terms aren’t synonymous.

The FASB chose the term “fair value” to prevent companies from applying IRS regulations or guidance and U.S. Tax Court precedent when valuing assets and liabilities for financial reporting purposes.

The FASB’s use of the term “market participants” refers to buyers and sellers in the item’s principal market. This market is entity specific and may vary among companies.

What goes into a fair value estimate?

When valuing an asset, there are three general valuation approaches: cost, income and market. For financial reporting purposes, fair value should first be based on quoted prices in active markets for identical assets and liabilities. When that information isn’t available, fair value should be based on observable market data, such as quoted prices for similar items in active markets.

In the absence of observable market data, fair value should be based on unobservable inputs. Examples include cash-flow projections prepared by management or other internal financial data.

While a CFO or controller can enlist the help of outside valuation specialists to estimate fair value, a company’s management is ultimately responsible for fair value estimates. So, it’s important to understand the assumptions, methods and models underlying a fair value estimate. Management also must implement adequate internal controls over fair value measurements, impairment charges and disclosures.

Valuation pros needed

Asset valuations are typically outside the comfort zone of in-house accounting personnel, so it pays to hire an outside specialist who will get it right. We can help you evaluate subjective inputs and methods, as well as recommend additional controls over the process to ensure that you’re meeting your financial reporting responsibilities.

© 2019

Management Letters: Have You Implemented Any Changes?

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Audited financial statements come with a special bonus: a “management letter” that recommends ways to improve your business. That’s free advice from financial pros who’ve seen hundreds of businesses at their best (and worst) and who know which strategies work (and which don’t). If you haven’t already implemented changes based on last year’s management letter, there’s no time like the present to improve your business operations.

Reporting deficiencies

Auditing standards require auditors to communicate in writing about “material weaknesses or significant deficiencies” that are discovered during audit fieldwork.

The AICPA defines material weakness as “a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.” Likewise, a significant deficiency is defined as “a deficiency, or a combination of deficiencies, in internal control that is … important enough to merit attention by those charged with governance.”

Auditors may unearth less-severe weaknesses and operating inefficiencies during the course of an audit. Reporting these items is optional, but they’re often included in the management letter.

Looking beyond internal controls

Auditors may observe a wide range of issues during audit fieldwork. An obvious example is internal control shortfalls. But other issues covered in a management letter may relate to:

  • Cash management,
  • Operating workflow,
  • Control of production schedules,
  • Capacity,
  • Defects and waste,
  • Employee benefits,
  • Safety,
  • Website management,
  • Technology improvements, and
  • Energy consumption.

Management letters are usually organized by functional area: production, warehouse, sales and marketing, accounting, human resources, shipping/receiving and so forth. The write-up for each deficiency includes an observation (including a cause, if observed), financial and qualitative impacts, and a recommended course of action.

Striving for continuous improvement

Too often, management letters are filed away with the financial statements — and the same issues are reported in the management letter year after year. But proactive business owners and management recognize the valuable insight contained in these letters and take corrective action soon after they’re received. Contact us to help get the ball rolling before the start of next year’s audit.

© 2019

Budgeting is Key to a Successful Start-Up

More than half of recent college graduates plan to start a business someday, according to the results of a survey published in August by the American Institute of Certified Public Accountants (AICPA). Unfortunately, the AICPA estimates that only half of new businesses survive the five-year mark, and only about one in three reach the 10-year mark.

What can you do to improve your start-up’s odds of success? Comprehensive, realistic budgets can help entrepreneurs navigate the challenges that lie ahead.

3 financial statements

Many businesses base their budgets on the prior year’s financial results. But start-ups lack historical financial statements, which can make budgeting difficult.

In your first year of operation, it’s helpful to create an annual budget that forecasts all three financial statements on a monthly basis:

1. The income statement. Start your annual budget by estimating how much you expect to sell each month. Then estimate direct costs (such as materials, labor, sales tax and shipping) based on that sales volume. Many operating costs, such as rent, salaries and insurance, will be fixed over the short run.

Once you spread overhead costs over your sales, it’s unlikely that you’ll report a net profit in your first year of operation. Profitability takes time and hard work! Once you turn a profit, however, remember to save room in your budget for income taxes.

2. The balance sheet. To start generating revenue, you’ll also need equipment and marketing materials (including a website). Other operating assets (like accounts receivable and inventory) typically move in tandem with revenue. How will you finance these assets? Entrepreneurs may invest personal funds, receive money from other investors or take out loans. These items fall under liabilities and equity on the balance sheet.

3. The statement of cash flows. This report tracks sources and uses of cash from operating, investing and financing activities. Essentially, it shows how your business will make ends meet each month. In addition to acquiring assets, start-ups need cash to cover fixed expenses each month.

By forecasting these statements on a monthly basis, you can identify when cash shortfalls, as well as seasonal peaks and troughs, are likely to occur.

Reality check

Budgeting isn’t a static process. Each month, entrepreneurs must compare actual results to the budget — and then adjust the budget based on what they’ve learned. For instance, you may have underbudgeted or overbudgeted on some items and, thus, spent more or less than you anticipated.

Some variances may be the result of macroeconomic forces. For example, increased government regulation, new competition or an economic downturn can adversely affect your budget. Although these items may be outside of an entrepreneur’s control, it’s important to identify them early and develop a contingency plan before variances spiral out of control.

Outside input

An accounting professional can help your start-up put together a realistic budget based on industry benchmarks and demand for your products and services in the marketplace. A CPA-prepared budget can serve as more than just a management tool — it also can be presented to lenders and investors who want to know more about your start-up’s operations.

Auditing Grant Compliance

A business situation.

Has your organization received any public or private grants to fund its growth? Grants sometimes require an independent audit by a qualified accounting firm. Here’s what grant recipients should know to help facilitate matters and ensure compliance at all levels.

Federal compliance

Federal awards require compliance with the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (also known as 2 CFR Part 200). This guidance requires any entity that expends $750,000 or more of federal assistance received for its operations to undergo a “single audit,” which is a rigorous, organizationwide examination.

To provide grant recipients with the latest guidance on compliance, the Office of Management and Budget (OMB) releases an annual compliance supplement. It covers compliance requirements for a dozen areas when performing a single audit:

  1. Activities allowed or unallowed,
  2. Allowable costs/cost principles,
  3. Cash management,
  4. Eligibility,
  5. Equipment and real property management,
  6. Matching, level of effort and earmarking,
  7. Period of performance,
  8. Procurement, suspension and debarment,
  9. Program income,
  10. Reporting,
  11. Subrecipient monitoring, and
  12. Special tests and provisions.

The supplement also includes sections dedicated to agency program requirements, including clusters of programs that share common compliance requirements.

Your auditor will assess whether your organization has sufficient internal controls in each of the 12 areas. To help ensure compliance, your organization should clearly document decisions and processes, as well as provide a clear audit trail of activity.

Other levels of compliance

The requirements for state, local and private sector grants vary significantly. But compliance generally hinges on the following, regardless of the source providing the funding:

  • A detailed understanding of the grant’s compliance and reporting requirements,
  • A mapping of requirements to individual controls and processes,
  • A documented set of grant management policies and procedures that your organization publicizes and follows,
  • A robust set of internal controls and mechanisms to prevent fraud, waste, and abuse,
  • Training programs designed to promote grant compliance,
  • Frequent risk assessments to map your organization’s policies and procedures against evolving requirements for each grant, and
  • Periodic auditing in compliance with relevant guidance and statutes.

In addition, your auditor will evaluate whether your organization is willing to adapt to regulatory changes. For example, has it adopted new grant controls to accommodate best practices or legislative changes?

We can help

If juggling multiple levels of grant compliance seems overwhelming, contact us to learn how to streamline your approach. We can help your organization improve its ability to satisfy grant requirements at multiple levels.

© 2019

Corporate Governance in the 21st Century

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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

The Untouchables: Getting a Handle on Intangibles

Businesswoman hands opened creating a space for product or text placement.

The average company’s balance sheet understates its value by 80%, according to Sarah Tomolonius, co-founder of the Sustainability Investment Leadership Council. Why? Intangible assets aren’t recorded on the balance sheet under U.S. Generally Accepted Accounting Principles (GAAP), unless they’re acquired from a third party.

Instead, GAAP generally calls for the costs associated with creating and maintaining these valuable assets to be expensed as they’re incurred — even though they provide future economic benefits.

Eye on intangibles

Many companies rely on intangible assets to generate revenue, and they often contribute significant value to the companies that own them. Examples of identifiable intangibles include:

  • Patents,
  • Brands and trademarks,
  • Customer lists,
  • Proprietary software, and
  • A trained and knowledgeable workforce.

In a business combination, acquired intangible assets are reported at fair value. When a company is purchased, any excess purchase price that isn’t allocated to identifiable tangible and intangible assets and liabilities is allocated to goodwill.

Acquired goodwill and other indefinite-lived intangibles are tested at least annually for impairment under GAAP. But private companies may elect to amortize them over a period not to exceed 10 years. Impairment testing also may be required when a triggering event happens, such as the loss of a major customer or introduction of new technology that makes the company’s offerings obsolete.

Inquiring minds want to know

Investors are interested in the fair value of acquired goodwill because it enables them to see how a business combination fared in the long run. But what about intangibles that are developed in-house?

At a sustainability conference earlier in May, Tomolonius said that businesses are more sustainable when they’re guided by a complete understanding of their assets, both tangible and intangible. Assigning values to internally generated intangibles can be useful in various decision-making scenarios, including obtaining financing, entering into licensing and joint venture arrangements, negotiating mergers and acquisitions, and settling shareholder disputes.

Calls for change

For more than a decade, there have been calls for accounting reforms related to intangible assets, with claims that internally generated intangibles are the new drivers of economic activity and should be reflected in balance sheets. Proponents of changing the rules argue that keeping these assets off the balance sheet forces investors to rely more on nonfinancial tools to assess a company’s value and sustainability.

It’s unlikely that the accounting rules for reporting internally generated intangibles will change anytime soon, however. In a quarterly report released in August, Financial Accounting Standards Board (FASB) member Gary Buesser pointed to challenges the issue would pose, including the difficulty of recognizing and measuring the assets, costs to companies, and limited usefulness of the resulting information to investors. Buesser explained that “the information would be highly subjective, require forward looking estimates, and would probably not be comparable across companies.”

Want to learn more about your “untouchable” intangible assets? We can help you identify them and estimate their value, using objective, market-based appraisal techniques. Contact us for more information.

© 2019