©20

11 L

arso

nAlle

n L

LP

111

©20

11 L

arso

nAlle

n L

LP

Construction Surety Forum

October 27, 2011 – Fort Lauderdale, FL

©20

11 L

arso

nAlle

n L

LP

2

Construction Surety Forum• Introduction –

Les Eiserman, CPA

• Internal Controls and Fraud Issues for Construction Contractors –

Les Eiserman, CPA

• Accounting Standards Updates and Budgeting For Contractors –

Les Eiserman, CPA and John Reed, CPA

• Succession Planning –Sue Christopher, CPA

• Emerging Tax Issues Impacting Construction Contractors –

(Hand Outs Only)

• Social

©20

11 L

arso

nAlle

n L

LP

3

Construction Surety Forum

©20

11 L

arso

nAlle

n L

LP

444

©20

11 L

arso

nAlle

n L

LP

Internal Controls and Fraud Issues for Construction Contractors

Presented by:Les Eiserman, CPA

©20

11 L

arso

nAlle

n L

LP

5

Learning Objectives

At the end of the session, you will be able to:

• Understand the importance of internal controls as it relates to reliability of financial information.

• Identify key controls that should be present for all construction contractors.

• Determine the effectiveness of your client’s internal control environment.

• Understand how an auditor addresses fraud.

©20

11 L

arso

nAlle

n L

LP

6

Internal Controls – Defined

Internal controls – a system or process designed to promote reliability of financial information and efficiency of operations.

Basic Examples would include:

• Proper separation of accounting duties

• Review of complex calculations

• Reconciliation of accounts

©20

11 L

arso

nAlle

n L

LP

7

Internal Controls Environment – Current Trends

The current environment of the construction industry is one of downsizing and reorganization. This creates the following potential issues in maintaining controls:

• As staff sizes decrease, fewer people have more responsibility.

• Information received by management might not be reviewed when they receive it.

• Added pressure for employees to look good.

©20

11 L

arso

nAlle

n L

LP

8

Internal Controls – Effects on the Bond Holder

The internal control environment should be considered for the following reasons:

• Reliability of financial information

• Management integrity

©20

11 L

arso

nAlle

n L

LP

9

Getting Started – Reliance on the Accountant’s Report

CPA’s assessment of internal controls:

• Audit = An understanding of internal controls is developed and a walkthrough is performed.

• Review and Compilation = Internal controls not evaluated.

• If an audit was performed, request a copy of the SAS 115 letter.

©20

11 L

arso

nAlle

n L

LP

10

• How do you determine the effectiveness of your client’s

internal control environment?

• Look for which controls are present and which are absent based on the hand out provided.

• We have broken down controls into three categories: Minimum, Expected and Best in Class.

Assessing Internal Controls – Grading your Client

©20

11 L

arso

nAlle

n L

LP

11

Key Internal Controls – Minimum

All companies should have these basic controls:

• Accounting functions properly segregated between authorization, recording and custody

• Reconciliation of subsidiary accounts such as: cash, accounts receivable, and accounts payable

• Review of accounts receivable for collectability

• Cash flow management

©20

11 L

arso

nAlle

n L

LP

12

Key Internal Controls – Expected

A good control environment should include the following:

• Detailed review of WIP schedules

• Frequent communication with project managers and accounting staff

• Proper authorization of purchases and cost coding

• Review of payroll reports and time cards

©20

11 L

arso

nAlle

n L

LP

13

Key Internal Controls – Best in Class

An excellent control environment should include the following:

• Proper training of employees. Cross-training to perform multiple functions

• Established vendor lists

• Systematic application of overhead

• Expansion upon segregation of duties and additional management oversight

©20

11 L

arso

nAlle

n L

LP

14

• Determine effectiveness of control environment based on checklist provided.

• Have client explain to you how they are producing reliable financial information.

• Discuss the importance of internal controls and make suggestions to your client based on key controls that are absent.

Discussing Internal Controls with your Client

©20

11 L

arso

nAlle

n L

LP

15

• Downsizing and reorganization have created greater strain on accounting departments and management.

• Strong internal controls leads to greater reliability of information.

• Assess the internal control environment to help determine reliability of financial information.

• Communicate internal control concerns and assure yourself that management is producing reliable financial information.

Conclusion

©20

11 L

arso

nAlle

n L

LP

FRAUD AND THEFT

©20

11 L

arso

nAlle

n L

LP

17

Fraud/Theft

• Auditors are required to assess the risk of fraud and theft (obtain reasonable assurance that the financial statements are free of material misstatement, whether caused by error or fraud). Absolute assurance is not attainable.

– If client has a loss, first question will be “Why didn’t the CPA Firm catch this!?”

– Lawyers and insurance companies want to put the responsibility on the auditors

– A CFO who missed the fraud might also want to shift the blame to the auditors

– Expectation GAP is wide

©20

11 L

arso

nAlle

n L

LP

18

Fraud and Theft: testing examples

• Payments by vendor, sorted by dollar amount or number of transactions

• Vendor address and employee address matching

• New vendor setup• New employee setup• List all manual checks• Payments just below approval thresholds• Multiple vendor payments with same amount• Vendors with missing contact information

©20

11 L

arso

nAlle

n L

LP

19

Questions or thoughts?

©20

11 L

arso

nAlle

n L

LP

202020

©20

11 L

arso

nAlle

n L

LP

Accounting Standard Updates

Presented by:Les Eiserman, CPAJohn Reed, CPA, CCIFP

©20

11 L

arso

nAlle

n L

LP

21

Accounting Standards Update

I. Update on US GAAP / IFRS Convergence Projects

a) Revenue recognition project – long-term contract implications

b) Accounting for leases

II. Update on Private Company Financial Reporting

III. Questions and discussion

©20

11 L

arso

nAlle

n L

LP

22

• Initial exposure draft – June 2010

• 6 months of “re-deliberation” to address public comments / concerns

• Re-exposure during the 4th Quarter, 2011 with 120-day public comment period

• FASB: Effective date no earlier

than 1/1/2015 for Public Companies

and 1/1/2016 for Private Companies

Revenue Recognition

©20

11 L

arso

nAlle

n L

LP

23

Revenue Recognition – Modifications to Draft

Identification of performance obligations:• “An entity should account for a bundle of promised

goods or services as one performance obligation if the entity provides a service of integrating those goods and services into a single item that the entity provides to the customer”

• Separate performance obligation only if:− Pattern of transfer of the good or service is different from the

pattern of transfer of other goods or services in the contract, and− Good or service has a distinct function – defined by:

Entity regularly sells the good or service separately, or Customer can use the good or service either on its own or

together with resources that are readily available to it

©20

11 L

arso

nAlle

n L

LP

24

Revenue Recognition – Modifications to Draft

Concept – Continuous Performance:Revenue can be recognized over the performance period if one of the two following conditions are met:

1. “Entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced”

Or

2. “Entity’s performance does not create an asset with alternative use to the entity and at least one the following is met:i. Customer receives a benefit as the entity performs each task, or

ii. Another entity would not need to reperform the task(s) performed to date if that other entity were to fulfill the remaining obligation to the customer, or

iii. Entity has the right to payment for performance to date even if the customer would cancel the contract for convenience”

©20

11 L

arso

nAlle

n L

LP

25

Revenue Recognition – Modifications to Draft

Contract Combination:Contracts that are entered into at or near the same time with the same (or related) entities should be combined if:

1. Contracts are negotiated as a package with a single commercial objective, or

2. Amount of consideration in one contract depends on the other contract

3. Goods and services in the contracts are interrelated in terms of design, technology or function

©20

11 L

arso

nAlle

n L

LP

26

Revenue Recognition

What’s the conclusion?

Everything to date continues to be “extremely preliminary” and subject to change. It is too early to draw decisive conclusions

It appears the concept of % of completion in continuing to be incorporated into the concept.

©20

11 L

arso

nAlle

n L

LP

27

Accounting For Leases

Background:• Initial exposure draft in August 2010• 780 comment letters• September 23 – Decision to re-expose

the revised proposal in the 1st half of 2012• Implementation – likely at least 2015 or later• Existing leases will not be grandfathered, so it

should be something we are discussing with clients that have substantial long-term rental activity

©20

11 L

arso

nAlle

n L

LP

28

Accounting for Leases – Lessee

Tentative decisions made:• What is a lease? – right to use a explicitly or implicitly

identifiable asset “for a period of time”• Lessee Accounting:

– Liability (payment obligation) and asset (right to use)◊ Asset: Amortize based upon pattern of consumption / economic benefit◊ Liability: Amortize using the effective interest method

• Lease term: non-cancellable period plus options to extend or terminate the lease when there is a significant economic incentive – Historical and subjective tests may also be considered

• Short-term leases: Exempt from reporting requirements? At least for now

©20

11 L

arso

nAlle

n L

LP

29

Accounting for Leases - LessorTentative decisions made:

Lessor Accounting:• Broad disagreement / many unresolved issues• Currently status: • Performance obligation method – scrapped• All leases (other than ST) will use the “receivable and

residual” approach – formerly called “derecognition” Recognize a lease receivable for the lessor’s right to receive lease

payments – Allocate the carrying value of the underlying asset being leased

between the portion related to the right of use granted to the lessee and the portion retained by the lessor (i.e., the residual asset)

– Recognize profit, if profit is reasonably assured, or any indicated loss

©20

11 L

arso

nAlle

n L

LP

30

Private Company Financial Reporting• Financial Accounting Standards Board (FASB)

created in 1973 to set standards for US GAAP. Since that time there has been an ongoing debate over whether there should be different standards for public (“Big GAAP”) and private (“Little GAAP”) entities

• In 2009, the Financial Accounting Foundation (FAF) which oversees the FASB created a “Blue Ribbon Panel” task force to study the issue. The Blue Ribbon Panel made its recommendations in January, 2011.

©20

11 L

arso

nAlle

n L

LP

31

The Blue Ribbon Panel Recommendations

• The Blue Ribbon Panel recommended a single set of accounting standards for both private and public companies but allowed for differences in disclosure and accounting transaction measurement between public and private companies.

• The Panel also recommended the creation of a private company standards board separate from the FASB to adopt the disclosure and measurement differences.

©20

11 L

arso

nAlle

n L

LP

32

Public Response to the BRP Recommendations

• The FAF received over 1,400 comments, including comments from LarsonAllen, sureties and agents. The vast majority supported the Panel’s recommendations

• The AICPA pushed for endorsement of the Blue Ribbon Panel’s recommendations.

©20

11 L

arso

nAlle

n L

LP

33

The FAF Releases Their Private Company Plan

• The FAF recommendations were released 10-4-2011.

• All parties agreed that there shouldn’t be separate standards for GAAP. What was agreed was a differential GAAP (not a separate GAAP). Differential GAAP is where private company only differences are codified into GAAP. Separate GAAP would require two separate systems of codification.

©20

11 L

arso

nAlle

n L

LP

34

FAF Private Company Proposal Comment Period• The FAF is recommending a private company

committee that makes recommendations that FASB must ratify. A separate board would have eliminated the ratification by the FASB. Since the private company committee is to be chaired by a FASB member, the groups are tied together closer than the Blue Ribbon Committee would have liked.

• The comment period ends January 14, 2012. To comment use the toolkit at: https://apps.aicpa.org/pcfr/.

©20

11 L

arso

nAlle

n L

LP

35

Contract Cost Allocations (Discussion)

• What Allocations Does GAAP Require?

• What Really Is Generally Accepted?

• Idle Equipment Costs

• What Costs In General Should Be Allocated?

• How Should Unallocated Costs Be Presented?

©20

11 L

arso

nAlle

n L

LP

36

Should These Costs Be Allocated?

• Idle Equipment Costs?

• Equipment Depreciation?

• General Liability Insurance?

• Vehicle Expenses and Depreciation?

• Other Costs?

©20

11 L

arso

nAlle

n L

LP

37

Questions

Accounting and Reporting

©20

11 L

arso

nAlle

n L

LP

383838

©20

11 L

arso

nAlle

n L

LP

Budgeting For Contractors

Presented by:

John Reed, CPA, CCIFP

©20

11 L

arso

nAlle

n L

LP

39

Why Are Our Clients Using This Model?

• Evaluate how much overhead their company can support

• Used as an interactive tool to plan for cash flow and profitability

• Used to support a bonding program runoff

©20

11 L

arso

nAlle

n L

LP

40

Three Key Variables Determine Profitability

• Gross Profit from job backlog

• Timing of work completion

• Overhead

©20

11 L

arso

nAlle

n L

LP

41

Using the Sample Excel Budget File

• History of the Model. • The four tabs

– Overall Budget – Shaded cells– Job Completion– Job to Date Revenue– Job to Date Cost

• Shaded cells are where client can enter data• Add job macro – CTRL+SHIFT+A

©20

11 L

arso

nAlle

n L

LP

42

Popular Budget Modifications

• Changing the operating expense line items to what appears on a company’s internal or external financial statements.

• Some clients have changed the model from quarters to months. They do that by inserting additional columns in all the tabs and copy the formulas to the right.

©20

11 L

arso

nAlle

n L

LP

43

Questions or Discussion?

©20

11 L

arso

nAlle

n L

LP

444444

©20

11 L

arso

nAlle

n L

LP

Succession Planning

Presented by:

Susan K. Christopher, CPA CCIFP

©20

11 L

arso

nAlle

n L

LP

45

Learning Objectives

At the end of the session, you will understand:

• The General Strategies

• Tax Considerations

• Concerns of a Bonding Company

• Valuation Issues

• Current Trends/Opportunities

©20

11 L

arso

nAlle

n L

LP

46

Succession Planning

primary goal is on long-term sustainability of the business

a proper plan allows for smooth transition both inside and outside of the business

the best plans strategize to transfer ownership in a tax efficient manner

©20

11 L

arso

nAlle

n L

LP

47

Ownership Transfer & Business Succession• Ownership transfer can occur with or without a

change in management through the use of voting and nonvoting shares.

• Business succession can be planned with or without an immediate ownership transfer

• The process of business succession begins by widening the concentration of management responsibility and decision making among an assembled team

©20

11 L

arso

nAlle

n L

LP

48

Tax Considerations

• 2011 and 2012:– $5 Million exemption for both Estate and Gift Taxes– Tax rate is 35%– Portability can allow for a surviving spouse’s

exemption to be $10 Million.

• 2013 - uncertainty:– Without Congressional action reverts back to 55% tax

and $1 Million exemption.– Proposal for 35% and $3.5 Million

©20

11 L

arso

nAlle

n L

LP

49

Concerns to the Bonding Company

• Financial Impact to the Company– If sale is involved, will the company directly or

indirectly fund it?– How will this liability impact the balance sheet?– How will it impact cash flow?

• Management– Does the successor play a role now with the bonding

company?

• Personal Guarantees for New Owners• Removal of Personal Guarantees for Sellers

©20

11 L

arso

nAlle

n L

LP

50

Additional Factors to Consider

• Identify the buyers• Identify the terms of the sale

– Timing and control– Is there real estate that will come out?

• What is the value of the business?

• How are the future leaders being developed?

• How will future debt be secured?

©20

11 L

arso

nAlle

n L

LP

51

Determining the Value

• Must document and properly value the company• Different approaches:

– Asset– Market– Income

• Discounts and Premiums– Control (+/-)– Marketability– Goodwill (personal or professional)

©20

11 L

arso

nAlle

n L

LP

52

Discounts vs. Premiums

Value of Control$10.00 per share Shares

40% minority interest discount Control Minority

Premium or Discount66 2/3 control premium

$6.00 per share

40% discount for lack of marketabilty

$3.60 per shareValue of non-marketableminority shares

A combined 40% minority discount and a 40% discount for lack of control equals a total of 64% discount from value of control shares

Value of minority shares if freely traded on an active public market ("publicly traded value" or "stock market value"

©20

11 L

arso

nAlle

n L

LP

53

General Tools/Transfer Strategies

• Annual Gift Exclusion

• Grantor Retained Annuity Trust (GRAT)

• Intentionally Defective Grantor Trust (IDGT)

• Installment Sale

• Employee Stock Ownership Plans (ESOP)

• Self-cancelling Installment Notes (SCINs)

©20

11 L

arso

nAlle

n L

LP

54

Conclusion

• There are numerous tools and planning ideas to effectively execute a succession plan.

• The tools are just the method used to execute the plan in the most efficient manner.

• Most important part of the plan is the Succession Plan itself. The present is enhanced by focusing on the future.

©20

11 L

arso

nAlle

n L

LP

55

Contact Us

Les Eiserman, CPA

leiserman@larsonallen.com

407-802-1203

John Reed, CPA

jreed@larsonallen.com

239-226-9903

Jack Rybicki, CPA

jrybicki@larsonallen.com

813-384-2701

Jill Kling, CPA

jkling@larsonallen.com

407-802-1210

Sue Christopher, CPA

schristopher@larsonallen.com

239-262-3562

Clint Freeman, CPA

cfreeman@larsonallen.com

813-384-2710

©20

11 L

arso

nAlle

n L

LP

565656

©20

11 L

arso

nAlle

n L

LP

Emerging Tax Issues Impacting Construction Contractors

Presented by:

Clint Freeman, CPA

Jill Kling, CPA

©20

11 L

arso

nAlle

n L

LP

57

Learning Objectives

• Be familiar with current tax updates effecting the construction industry

• Be familiar with current IRS targeted areas under examination

• Be aware of tax depreciation opportunities

©20

11 L

arso

nAlle

n L

LP

58

3% Withholding on Government Contracts• Effects payments for all goods and services under

government contracts◊ Includes payments to individuals for a service or product provided to

government

• Law applies to all governmental entities with total budgets of at least $100 million

◊ Federal, state and local

• For payments starting January 1, 2013

• IRS Frequently asked Questions

©20

11 L

arso

nAlle

n L

LP

59

IRS Hot Construction Topics• Surety bonds and insurance refunds

– Refunds not showing up on contractor’s books as income or expense reduction

– IRS checking for all insurance refunds

• Write down of real estate vales for tax purposes– Real estate not subject to lower of cost or market valuation– IRS looking for book/tax difference for GAAP impairment

• Joint Committee on Taxation Examinations– Heavy examination area– For refunds over $2million under net operating loss carrybacks

©20

11 L

arso

nAlle

n L

LP

60

Tax Depreciation• Accelerated Tax Depreciation

◊ Section 179 • 2011 - $500,000 (purchases < $2,000,000)• 2012 – Reverts back to prior rules

◊ Bonus Depreciation• 2010 – 50%/100%• 2011 - 50%• 2012 – Reverts back to prior rules

Ex 1) 2011 Equipment placed in service $700,000

Tax Depreciation: ($500,000 + $140,000) = $640,000

– Limitations – Business Income, Thresholds, new vs. used

©20

11 L

arso

nAlle

n L

LP

61

Repairs and Maintenance• Capital Expenditures vs. Repairs and Maintenance

– Capital Expenditures: • Substantially prolong the life of the property

• Materially increase the value of the property

• Adapt property to a new or different use

• Put the property into a useful condition

• Installation costs, additions, modifying a piece of machinery to have an additional use

©20

11 L

arso

nAlle

n L

LP

62

Repairs and Maintenance• Repairs and Maintenance

– Deductible Expenditures that are:◊ Incidental repairs

◊ Routine maintenance

◊ Materials that keep the asset in operating condition

• Examples of Qualified Expenditures– Repairs to roofing (including total replacement of existing roof)

– Replacement of flooring, doors, and windows

– Resurfacing of parking lots

– Painting and wall covering

– Components to HVAC systems

– Lighting, electrical, and plumbing

©20

11 L

arso

nAlle

n L

LP

63

Repairs and Maintenance• Situation #1:

– A 10 year old Roof is damaged in a hail storm. Half of the roof’s shingles need to be replaced. The original shingles were unsightly. The owner considers replacing the entire roof with a more standard shingle. Is this a capital expenditure? Or a repair and maintenance cost?

◊ Answer: Repair and Maintenance expense! Replacing the entire roof so that the shingles match is not considered an improvement to the entire building so that the shingles would not be capitalized.

◊ If the owner choose to upgrade the roof with a lower maintenance material with an expected life of 40 years – Capitalized!

©20

11 L

arso

nAlle

n L

LP

64

Repairs and Maintenance• Situation #2

– A Construction Company repaves the parking lot where heavy equipment is stored every year. After 3 years, the owner decides to tear out the old asphalt and replace it with reinforced concrete that should last for 15 years without the need for annual repaving. Are these capitalized expenditures or deductible expenses?

◊ Answer: Capitalize! The reinforced concrete installation will substantially prolong the life of the parking lot.

◊ The annual paving is an R&M expense from Year 1 to 3

©20

11 L

arso

nAlle

n L

LP

65

Repairs and Maintenance• Cost Segregation study – Buildings

– Identify assets that can be expensed

– Utilize Section 179/Bonus Depreciation

• Prior Year Capitalization of R&M

– Not necessary to file Amended returns

– Filing Form 3115 will change accounting method

©20

11 L

arso

nAlle

n L

LP

66

Tax Update • Set to expire or change after 2011:

– Itemizing Individuals - Sales tax deduction

– Research credit/Work Opportunity Tax Credit

– Residential Energy credit (contractors)

– 100% Bonus/179 Expensing limit to $125,000 (inflation indexed) on $500,000 of additions

– 50% Bonus in 2012

©20

11 L

arso

nAlle

n L

LP

67

Tax Update

“American Jobs Act of 2011” September 2011

• Extend 100% Bonus Depreciation to 2012

• Cut Social Security Tax from 6.2% to 3.1% on employees wages the first $5 million of their payroll

– Business Credit for Fall 2011- 2012 on wages from $5-$50 million

• $4000 credit for hiring new worker out of work for 6 months/$5600 veterans

• Limit tax exempt municipal interest to 28%