NEW FINANCIAL REPORTING STANDARD FOR DEVELOPMENT STAGE ENTITIES
On June 10th, the Financial Accounting Standards Board (FASB) issued new guidance regarding the reporting requirements of Development Stage Entities (DSE).
A Development Stage Entity is one in which:
* planned principal operations have not yet commenced, or
* planned principal operations have commenced, but no significant revenue has been produced
That definition covers many start-ups, although long-established institutions may also qualify if they haven’t yet produced a significant amount of revenue.
Under the previous GAAP requirements, DSEs were responsible for filing the same financial statements as established companies, plus additional information about their inception-to-date activities (such as income statement line items, cash flows, and equity transactions).
Now, with the release of Accounting Standards Update (No. 2014-10), the concept of a DSE is eliminated from U.S. GAAP and the inception-to-date reporting requirement for DSEs will be scrapped.
The new standard, which will begin to take effect in December 2014, but can be adopted earlier, is in response to stakeholder concerns about the cost of reporting the inception-to-date information, as well as the relevance and value of those additional presentation and disclosure requirements.
“The financial information required specifically of DSEs under GAAP was excessive, repetitive, costly, and had limited relevance to financial report readers,” said Corey Fischer, Managing Partner, Weinberg & Co. “This new standard is a definite improvement because it will reduce accounting, audit and legal costs. We’re all for making compliance less complicated — or as we like to say, ‘simply stated’.”
NEW REVENUE RECOGNITION STANDARD
On May 28th, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) jointly released a converged standard for recognition of revenue.
The convergence of U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), has been an ongoing goal of the FASB and the IASB, intended to increase the comparability, consistency, and quality of financial statement presentation.
At the heart of the new revenue recognition standard is the mandate that companies recognize revenue based on the value of transferred goods or services as they occur during the contract. Companies will be required to look for performance obligations within their contracts with customers and clients, and estimate a transaction price for each. As performance obligations occur (and goods or services are transferred), the company will recognize revenue based on the transaction price.
Further, the new standard eliminates the pre-existing GAAP tendency to have differing revenue recognition standards for different industries. The issuance of the converged standard aligns with the broader convergence goals of the FASB and IASB and will help investors better compare companies’ financial statements, regardless of industry, or even nationality.
Although the new standard takes effect in 2017, Weinberg Managing Partner Corey Fischer advises early planning. “You should begin assessing whether your information systems are capable of collecting the data necessary to implement the new standard and determine whether you need to adjust internal controls to address changes in the accounting resulting from the new standard,” he said.
FATCA AND FBAR -
NO SECRETS – NO MERCY
In recent weeks several news items have emerged underscoring the seriousness of U.S. authorities in pursuing overseas tax evaders.
First came a guilty plea from Credit Suisse, which admitted last month that it had helped U.S. citizens evade taxes through a series of maneuvers worthy of a James Bond novel. The bank was accused of setting up sham accounts, using separate remote-control elevators to conceal visiting clients, sending bank statements to clients concealed within Sports Illustrated magazines, and issuing offshore debit and credit cards to help clients stay under the U.S. regulatory radar.
It was further alleged that the bank sent undercover bankers on “vacations” to the U.S. to infiltrate golf tournaments and woo prospective clients. Such clients were sworn to secrecy, told not to correspond with their bankers via email or any other written communication, and to destroy bank statements after reading. More damning: Credit Suisse managers allegedly helped U.S. account holders file fraudulent tax documents.
By pleading guilty to criminal wrongdoing, the Swiss bank will be forced to pay a penalty of $2.6 billion and several bankers have been indicted. The Credit Suisse penalty is significantly higher than the $780 million settlement paid by UBS in 2009. Unlike UBS, Credit Suisse has not yet been compelled to release the names of the account-holders it admitted to helping evade taxes.
Credit Suisse’s guilty plea is a rarity. UBS and others accused of aiding overseas tax evaders have settled out of court. U.S. Attorney General Eric Holder celebrated the triumph with the words: “No bank is too big to jail.”
While FATCA is directed at forcing foreign banks to cooperate in reporting names of account holders, the Foreign Bank and Financial Accounts report (FBAR) is directed at taxpayers that have a financial interest in or signature authority over an account with more than $10,000 in a foreign bank.
A recent judgment against a Florida investor has raised questions about the constitutionality of the FBAR penalty structure. For several years, Carl Zwerner had failed to file his annual FBAR.
As the enforcement regime tightened, Mr. Zwerner filed overdue FBARs and amended his past tax returns in order to pay what he owed — a voluntary action known as a “quiet disclosure” — which typically would have allowed him to pay taxes owed without incurring the harsh failure-to-file penalties.
But the quiet disclosure triggered an audit and because he was considered to have “willfully” violated the law, he was assessed an especially painful penalty: 50% of the highest value of the non-disclosed accounts for each year in which they weren’t disclosed (2004, 2005, and 2006). This amounted to $2,241,809, roughly 150% of the total value of the accounts.
The judgment has raised concerns, both for the severity of the penalty as well as the fact that it was inflicted upon a taxpayer who voluntarily came forward and attempted to pay the taxes he owed. Some are now questioning whether such a steep penalty (one that could eclipse the entire value of an investor’s account) violates the U.S. Constitution’s Eighth Amendment’s Excessive Fines Clause, which prohibits penalties that are grossly disproportionate to the conduct. On June 6th, the district court set a hearing to consider how it intends to compute Mr. Zwerner’s penalty. At that time his attorneys are expected to challenge the constitutionality of the penalty.
While the government celebrates their huge winnings against one FBAR non-filer, tax advisors, lawyers and expats will be watching for a court decision that may severely curtail the penalty powers of the IRS. They also may be thinking about voluntary disclosures.
“The one-size-fits-all approach to overseas tax enforcement is placing a compliance burden on American expats, many of whom spend large sums on accounting services only to find they owe no tax to the U.S. government,” remarked Weinberg Tax Director Jeffrey Engler.
A provision recently added to the Senate’s tax extender legislation would authorize the IRS to contract with private collection agencies (PCA) to pursue unpaid tax debts.
Under the proposal, the IRS would turn over the details of citizens’ delinquent accounts to tax bounty hunters who would have authority to pursue the scofflaws and earn a portion of the recovered funds. The measure, sponsored by Charles Schumer (D-N.Y.) and Pat Roberts (R-Kan.), is intended to help collect taxes from some five million delinquent taxpayers.
While the Congressional Budget Office (CBO) estimates that the provision would bring in $4.8 billion between 2014 and 2024, the proposal has received harsh criticism.
Identity rights advocates warn of the danger of providing sensitive taxpayer information (including Social Security numbers) to PCAs and voiced concern that the proposed contingency-fee pay structure will lead to abuses.
Civil rights organizations, including La Raza and the NAACP, have also voiced their objections. Noting that many tax delinquents are unable to pay due to financial hardship, they say the proposal will disproportionally impact their constituents the hardest.
Even the IRS commissioner, John Koskinen, voiced opposition to the proposal in a recent House Ways and Means Subcommittee hearing, saying his agency would have limited oversight over PCAs to protect against overzealous collections and potential abuses.
This isn’t the first time the IRS would be authorized to outsource its debt collection. It was tried in 1996 and again in 2006; both attempts ended in failure with the government losing money.
An amendment to the tax extenders legislation has just been introduced by Senator Bob Cardin (D-Md.) which would, in effect, kill the PCA idea.
“Although it may be tempting to think that collection professionals might be better at collecting delinquent funds, this is one case where privatization is not the solution,” says Weinberg Managing Partner, Corey Fischer. “The lack of oversight can encourage aggressive behavior. Nobody wants to get a phone call from the IRS, but it may be far worse when bounty hunters show up on your doorstep.”
IRS RETHINKS 501(c) 4 GUIDANCE
Few areas of the federal bureaucracy have elicited more controversy over the last year than the IRS’ Exempt Organization group.Last year’s “targeting” scandal involved allegations that IRS employees inappropriately applied additional scrutiny to 501(c)4 entities that had conservative buzzwords in their organization name (such as “tea party,” or “patriot”). As a result, applications for exempt status from such groups were either denied or significantly delayed.While it is established tax law that 501(c)4 entities must not have political activity as their primary purpose, the decision to flag and scrutinize organizations based on their names (rather than activities) has already cost the jobs of a few IRS employees.
In response to the scandal, last year the IRS proposed additional guidelines for its employees to better determine when a 501(c)4 had crossed the line by engaging in overt political activity. Per the proposed guidance, activities such as advertising, offering voter guides, voter-registration or get-out-the-vote campaigns, internet references to candidates, and candidate appearances at organization events, would all potentially be cause for a group to be denied tax-exempt status.
Groups from across the political spectrum joined together in their criticism of what they considered overly-vague criteria and an infringement on free speech. As a result of more than 150,000 comments and objections received, the IRS has backed off from continuing its earlier guidelines.
“It is likely that we will make some changes to the proposed regulation in light of the comments we have received,” the IRS said in a statement last month. “Given the diversity of views expressed and the volume of substantive input, we have concluded that it would be more efficient and useful to hold a public hearing after we publish the revised proposed regulation.”
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Weinberg & Company is a leading, international, full service, multi-office CPA firm serving clients throughout the United States and the Pacific Rim. Founded over two decades ago, the practice groups include: Assurance and Audit, Tax and Accounting, and Advisory Services. Weinberg has a depth of knowledge and experience to meet the needs of both public and privately held companies, high net worth individuals, entrepreneurs, family offices, and can provide customized business management services. www.weinbergla.com
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