What you need to know about valuation standards and their impact

Valuation of a business or an interest in a business may be done for many purposes. What many businesses don’t understand, however, is that the applicable standard of value required in the specific situation has a direct impact on the final result.

Smart Business spoke with John T. Alfonsi, Managing Director at Cendrowski Corporate Advisors LLC, about the impact the purpose of the valuation has on the result.

What are some reasons a business valuation would be called for?

A business or an interest in a business may need to be valued for a sale of the business or interest, gift tax purposes, estate tax purposes, shareholder or partner buy-out/redemption, divorce, litigation purposes, or financial reporting purposes, among others. The same interest in the business may have a different value depending on the purpose of the valuation.

How does the purpose of the valuation affect the bottom line value?

The applicable standard of value dictates what the value may be. The standard of value answers the question ‘Value to whom?’ which has an effect in determining the value of the asset. There are many standards of value, but some of the more common are fair market value, fair value and investment value.

What are the standards?

Fair market value is probably the most common standard and the one people hear most often. It is the applicable standard for all federal tax purposes, whether it is income tax, gift tax or estate tax.

Fair market value is the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, and both parties have reasonable knowledge of relevant facts.

Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and are informed about the property and the market for such property. It is not the value to a specific person or buyer, but is generally thought of as the value to a hypothetical financial buyer.

Fair value has a couple of meanings. For financial reporting purposes, fair value means 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.

It is similar to fair market value but with some subtle differences, for instance it’s meaning for state law purposes.

Fair value in state law shareholder dispute matters is generally defined as the value of the corporation’s shares determined immediately before the effectuation of the corporate action to which the shareholder objects using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal without discounting for lack of marketability or minority.

The valuation analyst needs to be familiar with the applicable standard for the state to which the matter relates, as each state may be different. Investment value is the value to a specific person.

It is most commonly used in a sale or merger transaction as it will capture the synergies of the business with the specific buyer/acquirer.

How do these standards of value affect a 20 percent interest in a closely held business?

Where fair market value is the applicable standard, the value would be the price at which a hypothetical buyer would pay for that 20 percent interest. It may reflect any applicable discounts in that determination, such as a discount for lack of control and a discount for lack of marketability.

In a state law fair value context, the value would be 20 percent of the value of the entire business without regard to any discounts for lack of control and lack of marketability. It generally produces a value, then, which is greater than that determined under a fair market value standard.

Investment value would take into consideration synergies or value with respect to the specific buyer.

It is most commonly applied in valuing the entire business rather than an interest in the business. Investment value would generally produce a value greater than that determined under a fair market value if the buyer is a synergistic buyer rather than a financial buyer. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

How to make your building work for you with a cost segregation study

If your business has recently invested in construction or purchased commercial real estate, consider getting a cost segregation study. These studies offer immediate and significant tax savings through accelerated depreciation deductions for current tax provisions and improved cash flow.

“If you buy a building and it’s all capitalized as one lump sum on a business’s tax return, then it can only be depreciated over 27 to 39 years,” says Matthew Sanders, CPA, audit manager at Rea & Associates. “But if you break it down into cost components, the business owner can depreciate certain costs over five, seven or 15 years to accelerate tax deductions.”

Smart Business spoke with Sanders about the benefits of a cost segregation study.

Who should consider getting a cost segregation study? Are there instances where this can be more valuable?

Companies that are either constructing or purchasing a building can benefit from cost segregation studies. Also, cost segregation studies can prove valuable for renovations, depending on the total cost.

The type of facility plays a part in the cost benefit. The more complicated the building, the more worthwhile a study might be. If it’s just a warehouse that’s going to be used for storage, it may not have a significant amount of separate components that would assist you in accelerating depreciation like electric, plumbing, HVAC systems, offices, etc.

What are the benefits to a study?

It’s a time value of money benefit. By accelerating your tax deductions and reducing your tax liability, you increase your current cash flow. This can prove important to a business when making such a large investment. Studies have shown that the amount of costs that can be reclassified to a shorter recovery period range from 15 to 40 percent of total costs. It still ends up in your favor if the study costs $10,000 to $20,000.

Besides immediate tax savings and increased cash flow, a cost segregation study assists in creating great records and an audit trail that could help to resolve IRS inquiries quickly. A business isn’t more likely to be audited because of a cost segregation study, but in the event it does get audited, it’s helpful to have these records on hand.

There are also potential opportunities to reduce real estate tax liabilities and identify sales and use tax savings opportunities.

When should you get a study done?

It’s best to perform a cost segregation study within a year of purchase or construction. But if you have a look-back study done a few years after you are in the building, the IRS allows you to catch-up. You’ll have a lower tax liability that first year because you’re catching up the depreciation.

The longer you wait, however, the more you’ve already recognized the depreciation on the building so the catch-up may not be as great and the cost benefit can be lower.

How can new rules help with writing off replacement costs?

Cost segregation studies assist in identifying the replacement cost of a specific component of a building, which can be written off in the year of replacement under new IRS regulations.

For example, if a building owner replaces a roof on the building and no study was performed, the costs of the replacement are capitalized on the building owner’s depreciation schedule. Essentially, he or she could be depreciating both roofs. Under the current IRS rules, the value of the old roof (if known) can be written off in the year the replacement is performed.

What are the first steps to getting started on a cost segregation study?

If you think a cost segregation study might make sense for your organization, call your CPA or business adviser. They can help you do an assessment of how valuable a cost segregation study could be and help you gather the necessary records.

Studies can take one to two months, so plan on setting aside some time to work with the engineering specialist.

And while good records are important, an experienced engineer should be able to do an extensive site visit if you don’t have the necessary records available. This includes measuring and estimating costs using accepted techniques and pricing guides to identify all property costs and determine which components qualify for shorter recovery life periods.

Insights Accounting is brought to you by Rea & Associates

Understanding, mitigating cybersecurity risk

In today’s economy, information and technology drive value creation for businesses of all sizes across every industry. Information can be accessed and stored remotely in real-time, allowing for collaboration and coordination across time zones and continents.

While information technology has changed and improved the way business is conducted, it has also changed the equation for organizational security. In a world where information is value, information is also a target. Data security is now organizational security. In order to protect themselves and their customers, business owners must now develop a strategic approach to data security.

Smart Business spoke with Jalal Nazeri, senior IT audit manager at Sensiba San Filippo LLP, to learn more about best practices for addressing cybersecurity, assessing data security and developing strategies to mitigate risk and demonstrate controls.

What is the first step a company should take when assessing cybersecurity risk?

The first step a company should take is to perform a comprehensive risk assessment for the environment, with a major emphasis on the risks with the organization’s data.

Different types of data carry different levels of value and risk. Data such as protected health information (PHI) and personally identifiable information (PII) are highly sensitive. Companies handling this type of data must comply with state and federal legal data security regulations.

Other companies may transmit highly valuable intellectual property — whether their own or that of clients or customers. Once you understand your data, you can prepare the right plan to protect it.

Once a company understands the value of their data, what comes next?

The most effective security step a company can take is to ensure that the data itself is encrypted. Encryption isn’t a bad idea for any valuable data, but for highly confidential information like PHI and PII, it’s absolutely essential.

How can companies prevent a data breach?

Encryption is the key to preventing a data breach. Annual or semiannual risk assessments are critical to identifying new weaknesses in the infrastructure.

Creating a security policy is an important piece to creating a secure environment. The purposes of a security policy is to ensure that appropriate measures to protecting the network are written down, communicated and are put in place. Once a security policy is established, ongoing monitoring and maintenance of your policies and procedures will ensure ongoing effectiveness.

What other steps can be taken to protect data?

There are many tools and strategies available for preventing both data theft and data loss including IDS/IPS, anti-virus software, system monitor logs, firewalls, off-site backups and more. Keeping data secure requires utilizing these tools strategically to mitigate potential risks. To be effective, both your security policy and the tools that you utilize to carry out your policy must be reviewed and updated regularly.

What additional advice can you offer regarding cybersecurity?

You can’t lose what you don’t have. Many businesses keep valuable data longer than necessary. Businesses should understand data retention requirements and create data policies that ensure that sensitive data isn’t being stored unnecessarily.

Regardless of the business you run, your data will continue to become a more important part of your success. As a business owner, it is critical to understand that where there is value, there is always risk. When you consider both the value and the risk associated with your information systems, you can advance and protect your organization at the same time.

Insights Accounting is brought to you by Sensiba San Filippo LLP

Understanding physical and online retail convergence

Technology has fundamentally changed the consumer retail experience, which has led to evolving consumer behaviors and expectations.

Consumers have become more demanding, requiring the convenience and information of online shopping with the service and feel of the in-store experience.

This modern consumer has necessitated a new type of business model, one that must seamlessly provide both online and in-store shopping alternatives integrating customer service, systems, supply chain and execution.

Smart Business spoke with Frank Balestreri, audit partner at Sensiba San Filippo LLP, about the changing landscape of the retail industry.

Are brick-and-mortar stores heading for extinction?

It wasn’t long ago that many believed that brick-and-mortar stores were going the way of the dinosaur, yet changes in consumer behavior brought on by online retail have led to something altogether different.

Instead of eliminating their demand for in-store experiences, consumers are now demanding the best of both worlds.

They want the convenience of online shopping along with the service and hands-on feel of the in-store experience.

Brick-and-mortar stores might be shrinking in size, but they aren’t going away.

How are changing buying habits affecting business strategies?

Changes in consumer demands and behaviors have led to changes in strategy for traditional and online retailers.

Online retailers are increasingly realizing that they need to have a physical presence, while traditional big-box retailers continue to enhance the online experiences they provide to their customers, leading to the rise of an integrated retail business model known as brick-and-click.

To be successful, the brick-and-click model requires aligning all retail channels to create a uniform buying experience.

The white glove customer experience of a store must also be available online, while the convenience and information of online shopping has to be present even inside of a store.

We are now seeing sales representatives in stores carrying tablets that connect in real time with integrated global inventory systems, while online retailers are using data and systems to offer suggestions for complementary purchases, just like a live sales associate.

What does the emergence of brick-and-click mean for accounting systems?
The brick-and-click model has tremendous potential, but it doesn’t come without challenges.

To be successful, businesses must coordinate their warehouses, stores, online distribution channels, and even sales and support functions.

As companies face changes in purchase and return cycles, we help them reinforce internal controls and develop accounting policies critical to managing the increased return volumes over longer time periods.

Smart retailers are using technology, information and training focused on customer service to minimize returns while keeping their customers happy.

Elongated exchange cycles and online consumer buying behaviors have also led to difficulties in establishing effective revenue recognition policies. Online purchases can have greater return volumes that stretch over longer time periods.

For example, consumers may purchase multiple sizes or colors of the same item, planning to return what they don’t want, knowing that in many instances the shipping is free.

This behavior presents a revenue recognition challenge. It’s important to capture and analyze data necessary to incorporate buyer behavior into revenue recognition policies.

Finally, integrating sales across multiple channels can stress inventory management systems. Systems must be able to track inventory levels, sales and returns across multiple channels and locations.

This requires integrated systems, proven policies and real-time data.

While brick-and-click strategies are being successfully implemented by both traditional and online retailers, the strategy doesn’t come without obstacles. To be successful, systems, processes and people must be aligned to achieve a uniform and optimized customer experience. ●

Insights Accounting is brought to you by Sensiba San Filippo LLP

How ESOPs align shareholder and employee interest

As baby boomer business owners age, there is a pressing need to select their business exit strategy. One option is an employee stock ownership plan (ESOP), where the business owner sells the company — up to 100 percent of the stock — to the employees.

If you sell 30 percent or more, there are tax advantages that could mean that you end up with more after tax proceeds than selling to an outside party. This is nice, but often the bigger benefit is your legacy.

“If you sell to an outside third party, whoever buys it can do whatever they want with your business, and they may not maintain the employees or your business philosophy,” says Tim McDaniel, CPA/ABV, ASA, CBA, director of business valuations at Rea & Associates. “But with an ESOP, your business philosophy usually continues, and the employees continue to have jobs.”

At the same time, the employees get ownership, which motivates them to put in the extra effort and work as a team to build their own stock value. They have more pride going to work, and many long-term employees can retire with a nice nest egg if the company does really well, he says.

Smart Business spoke with McDaniel about which companies may be right for an ESOP.

Have ESOPs become more popular?

They haven’t exploded in popularity, but ESOPs are more popular today than they were a few years ago. In the past, the complexity intimidated business owners, and many lenders were reluctant to fund ESOPs. This has changed as knowledge about how ESOPs work has grown.

How are ESOPs different from employee stock option plans?

In an ESOP, which is most often an exit strategy, all employees own stock — although compensation and longevity will determine how much. An ESOP gives certain employees the right to buy stock. The key word is ‘certain.’ Usually, the company offers top-level employees stock as a short-term incentive.

What organizations are best suited to become ESOPs?

ESOPs are costly to establish because you need to hire an attorney, trustee and valuator. Therefore, they aren’t a good idea for companies without very much profit. A good rule of thumb is that you need at least $500,000 in ongoing profit for it to make economic sense.

In addition you need a strong management team. An ESOP is a leverage transaction and requires a bank loan. It’s important to have a leadership team that is able to manage the business and pay back the loan over time.

A stable workforce with little turnover is also important. The ESOP pays employees, usually over a period of five years, when they quit or retire; and it’s usually a large portion of their retirement plan.

Are there any disadvantages to ESOPs or risks that you should guard against?

Like any owner, the employees face the same advantages and disadvantages of owning a business — there’s higher risk and reward.

Some ESOPs replace other retirement plans for employees and if all of their retirement is in your company stock, they can be severely hurt if the company doesn’t do well or goes bankrupt. Don’t encourage this. You’ll want to allow for some diversification in the employees’ retirement.

The Department of Labor and IRS regulate ESOPs, so there will be more oversight from outside parties. Also, with new shareholders, some things like how much money you and the company makes is available to your employees. An ESOP might be your best exit strategy if you would like your legacy to continue and your employees to act like owners, and you don’t mind the additional oversight and cost.

Also, remember that you aren’t locked into an ESOP forever. If the ESOP no longer meets the needs that it was set up for, you can terminate the plan. But just like establishing an ESOP, it’s not cheap.

If this sounds like something that might work for your company, what’s the first step?

You’ll want to have somebody come in and do a feasibility study of what it actually would look like for your business. The study will determine what the value would be and what after-tax proceeds a business owner could expect. Then, you can determine whether to proceed, go another way or defer until your business is healthier.

Insights Accounting is brought to you by Rea & Associates

How key measures can detect and avoid fraud incidents in your organization

Fraud is ever present in today’s business world and many companies are concerned with the possibility of it occurring within their own organization. No matter how well you run your business or how well you may know and trust your employees, no organization is not susceptible to fraud.

Smart Business spoke with Michael Maloziec, Accountant at Cendrowski Corporate Advisors, to discuss how a company can prepare itself and prevent the possibility of fraud.

How large of an impact can fraud have on an organization? 

The latest Report to the Nations, which is a research study conducted by the Association of Certified Fraud Examiners, found that a typical organization loses 5 percent of revenues each year to fraud. Although that does not sound like a significant number, if applied to the estimated Gross World Product, this 5 percent equates to a potential global fraud loss of nearly $3.7 trillion. The ACFE also reported that the median loss cause by frauds in the study was about $145,000.

Where within an organization is the risk of fraud greater than others?

One of the most vulnerable areas to keep an eye on would be cash. Make sure this part of the business is well-controlled and there are a set of solid standards in place, such as segregation of duties. Organizations need to make sure that more than one person has control of the bank account. The employee working on the bank reconciliation should not be the same person who is writing checks and making deposits. Additionally, the bank statement should be reviewed each month for any suspicious or unexpected activity. Having solid standards can help prevent many fraud schemes before they even develop. However, a fraud can only occur if it possesses three distinct elements.

What are these three elements of fraud? 

Every fraud situation will have each of the following three elements present: motive, rationalization and opportunity. These three elements are known as the fraud triangle.

Motive describes the compelling need for funds which drive the perpetrator. This could be anything from lifestyle needs or behavior such as a gambling addiction.

Rationalization describes the mindset of the perpetrator in which they rationalize their fraudulent acts and believe what they are doing is not a crime.

The last element of the fraud triangle is opportunity. Opportunity generally occurs because of a control lapse. Fraud deterrence focuses on removing one or more of these three causal factors of fraud. Motive and rationalization are generally dependent on personal situations in which the organization has very little control over. Since the opportunity element is controlled by an organization, this is often the most targeted aspect of fraud deterrence. Fraud is not a random occurrence and only happens in situations in which the conditions allow for the fraud to happen.

What are some ways organizations can prevent fraud? 

A recent study revealed that having a set of strong internal controls in place would be the most effective method of preventing fraud.  Internal controls close the door on opportunity. The presence of anti-fraud internal controls can contribute to the reduction of fraud by upward of 66 percent. Also, it is imperative that management review and enforce your company’s internal controls. Without enforcement, the internal controls will not stop the opportunity for fraud.

How can internal controls help an organization? 

Control activities help ensure a business process produces valid transactions, and that financial statements are accurate. To be valid, a transaction must conform to several standards such as being completely and accurately recorded, legitimate and recorded in a timely manner.

Additionally, monitoring controls are intended to ensure that transactions not conforming to these standards, raise red flags, and the transaction is quickly identified and corrected. The opportunity for fraud and financial misstatement exists where control procedures are not effective in achieving these standards.

What happens if you suspect fraud within your organization? 

If your company suspects a fraud has occurred, it might be helpful to retain a forensic accountant to investigate the matter. They can help your organization design anti-fraud control processes, which will mitigate future risks. Forensic accounts can also quantity the economic damages if a fraud has occurred.

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

Plan sponsors are accountable for more than most realize

Sponsoring a 401(k) plan can bring tremendous value to your organization. Having a great benefit plan can boost the morale of your team members and improve your ability to attract and retain top talent. Managing your 401(k) plan, however, can get more complicated. In fact, many companies are failing to meet their basic responsibilities as a plan sponsor.

Whether you sponsor a large or small plan, your fiduciary responsibilities are the same. Both the Department of Labor (DOL) and IRS conduct examinations of 401(k) plan sponsors, so it’s critical to understand and meet your responsibilities.

Smart Business spoke with Suki Mann, senior manager at Sensiba San Filippo LLP, to learn more about the responsibilities of 401(k) sponsors.

What is the biggest misconception of 401(k) plan sponsors?

Many plan sponsors are overly reliant on third-party service providers, assuming that because they are paying someone else to manage their plan all of their responsibilities have been met. In reality, 401(k) sponsors frequently fail to meet their basic fiduciary responsibilities, and in doing so, fail to look out for the best interests of their employees and their organization. Failing to meet requirements can lead to larger investigations from the IRS and the DOL as well as more money coming out of your pocketbook.

What are the fiduciary responsibilities of plan sponsors?

As a plan sponsor, you are responsible for managing the assets of your employees. Both the IRS and the DOL have published requirements pertaining to the fiduciary responsibilities of plan sponsors.

Commonly overlooked requirements include holding plan management meetings at least once per year to review the performance of the plan, quarterly statement reviews to look for any inconsistencies that could indicate fraud, and reviewing fees charged to both the plan and plan participants to ensure that they are reasonable. Your third-party provider can also help you understand your responsibilities. Just remember that hiring a third-party plan provider alone doesn’t ensure that you are meeting your responsibilities; in fact, reviewing their work is part of your fiduciary responsibility.

What are some of the common pitfalls found during DOL and IRS examinations?

Government examinations are not the best time to find out about problems with your plan. Understanding what problems are typically found during examination can help plan sponsors find and correct problems before they are revealed under examination.

Many sponsors fail to meet document retention requirements, mistakenly assuming that their third-party plan provider is keeping all documents. When participants take hardship distribution or borrow money from the plan, these activities must be documented and records should be retained.

It is also common for plans to fail to adequately define ‘salaries’ and ‘contributions,’ which leads to incorrect matching contributions that can create liability and interest for the plan sponsor.

Many smaller plans have nondiscrimination issues, where plan contributions are unfairly top heavy. Other plans have problems omitting eligible employees. It is critical that management notifies employees when they become eligible, and follow up on participation.

How can sponsors correct previous mistakes and become compliant?

The DOL voluntary fiduciary correction program generally provides plan sponsors with the opportunity to self-report and correct problems before fines are assessed. Both the IRS and DOL are generally much more lenient regarding self-reported corrections as opposed to problems found under examination.

Regardless of the size of your plan, you have a fiduciary duty as the plan sponsor. While larger plans require audits that often identify problems during the audit process, smaller plans also need to ensure that their fiduciary responsibilities have been met.

If you have questions regarding your fiduciary responsibility as a plan sponsor, visit the DOL or IRS website, or call a qualified adviser for a thorough review of your 401(k) plan.

Insights Accounting is brought to you by Sensiba San Filippo LLP

SHOP, drop, roll or self-insure: It’s not too late to examine all health insurance options and switch

The 2015 tax season will soon be in the rearview mirror. But that doesn’t mean businesses should stop evaluating health insurance options. Since the dawn of the Affordable Care Act (ACA), businesses have been trying to figure out what’s the best route to take when it comes to health care coverage. There are a handful of options — all with unique pros and cons.

“Health care insurance options are something all businesses should be evaluating continuously,” says Joe Popp, tax manager at Rea & Associates. “Just because a business decides one route is best right now doesn’t mean that it will be the most effective or efficient choice down the road.”

Smart Business spoke with Popp about five health insurance options — Small Business Health Options Program (SHOP), drop, roll, self-insure and private exchange.

What is the SHOP and who benefits?

The SHOP is the business portal to exchange insurance. Right now in Ohio, it’s available only to companies with fewer than 50 full-time equivalent employees.

It’s best for a company that is having trouble paying for coverage or doesn’t want to contribute a lot for insurance, and whose employees generally wouldn’t get a premium tax subsidy. The employer can put as much or as little toward insurance as it wants, but the employees still can pay with a pre-tax deduction.

The drop option is self-explanatory, but doesn’t it hurt the employees?

If a business drops health insurance coverage altogether, employees would have to buy insurance on their own. If the employee qualifies for premium subsidies or cost sharing they often get better quality coverage for a lower price than with their employer.

Dropping coverage may be the best option for companies whose employees would be eligible for premium subsidies, meaning relatively low income individuals or families with many children and relatively high income (single breadwinner families).

How does roll work?

You continue with your current coverage, even though it may be inefficient in the short term. Many people decided last December to renew early and roll over coverage to get another year of reduced ACA compliance and cost.

This is typically the best option for those with more than 50 employees who want to take a wait and see approach. With uncertainties in legal challenges, new requirements coming online in future years and the exchanges still in their infancy, choosing to delay a major change for a few years is a perfectly fine strategy.

What is the self-insure option?

The employer takes on the risk that an insurance company normally takes, up to a certain dollar amount, and gets a stop-loss plan over the top for a smaller premium. The employees still pay into a system, but often at lower amounts.

For the employer, some years you’ll ‘win’ and some you’re going pay a few large deductibles. As long as, on average, you come out better in the years when no one has high medical costs, the business as a whole wins. This is a good option for those with 100-plus employees as they can more effectively spread risk.

How does the private exchange operate?

Instead of using the federal government’s exchange, you access a custom exchange with a smaller set of providers. It’s best for employers with 100-plus employees.

Your company can set up a private exchange and employees pick what they want with a monthly stipend. The employer contribution might cover the bargain basement $6,000 deductible coverage, and if employees want better coverage, they pay in. It’s like shopping on Amazon.com with a gift card from the employer.

When do employers need to make a decision?

Before your next insurance renewal date, evaluate these options to see if one is more efficient. Think about it, talk to employees and run numbers to see what it could do for employer and employee costs. Do the groundwork now, even if you don’t end up making a change until next year or after.

Insights Accounting is brought to you by Rea & Associates

Equipment appraisal: When you may need one and what to expect from it

At some point in time, almost every business owner will be faced with the question -— what is your machinery/equipment really worth? Book value is rarely an accurate representation of what the equipment is really worth. The ones asking want to know the real value, one that is accurate and can be substantiated.

Knowing when this question might arise and what to expect when it does could enable a business owner to be prepared with an answer… even before being asked.

Smart Business spoke with Theresa Shimansky, a manager at Cendrowski Corporate Advisors LLC, about machinery and equipment appraisals.

When is it time to have a certified appraiser evaluate a business’s equipment?

There are more than 20 reasons why businesses may need a machinery/equipment appraisal. Some of the most common reasons for appraisals are mergers and acquisitions, business valuations, bankruptcy, financing and SBA lending, insurance, buy/sell agreements, property taxes and partnership dissolutions. A certified, reputable appraiser has the training, expertise and knowledge to provide a value that can be substantiated and reflects the true value of the equipment.

Are there different types of certified appraisal reports?

Yes, according to the Uniform Standards of Professional Appraisal Practice (USPAP) for personal property appraisals, section 8, there are two types of written appraisals; Appraisal Reports and Restricted Appraisal Reports. A Restricted Appraisal is one in which the client and intended user of the report are the same. However, if the intended user(s) includes someone other than the client under USPAP standards, the appraiser must use the Appraisal Report format. If anyone other than the appraiser’s client will be relying on the report, it cannot be a Restricted Appraisal Report.

How long does an appraisal take?

It will depend on several factors; first, how much equipment is being appraised. A large factory with thousands of pieces of machinery will take far longer than a small restaurant with only a couple of dozen pieces of equipment.

Other factors that can affect how long the appraisal will take are timing requirements — when do you need it, how many levels of value are being requested, and the type of equipment is it rare or can comparable items be easily found.

What will a certified appraisal cost?

Every appraisal has different requirements. The simplest answer is the cost will vary with the scope of work.

What can I expect during the process?

Expect the appraiser to view the equipment and document any pertinent information that will help to identify the equipment. The appraiser will ask about the make, model and serial number of the equipment, its condition, whether it has been properly maintained and if there are maintenance records and if the equipment has special features or upgrades. Appraisers may let clients know in advance what they will be looking at and any documentation they will need so that it can be available during the inspection.

Once the appraiser has documented the equipment. the research process begins. The appraiser will establish a value for the machinery/equipment and then write and certify the report.

Is the appraiser required to personally view the equipment?

An appraiser does not need to personally view the equipment. The appraiser can rely on another party (including the client) to provide necessary documentation. This is considered a “desktop appraisal,” and the appraiser is required to disclose this within the report and in the report certification.

What should a business owner look for when choosing an appraiser?

When choosing an appraiser, a company shouuld only use a “qualified appraiser.” This individual, as defined by the IRS, has earned an appraisal designation from a recognized professional organization for competency in valuating property. Also, qualified appraisers regularly prepare appraisals for which they are compensated and demonstrate verifiable education and experience in valuating the type of property being appraised.

Accounting is brought to you by Cendrowski Corporate Advisors LLC


How financial reporting can help foster board member involvement

From time to time, nonprofit organizations may experience a lack of engagement of their board members during regular board meetings. There could be many reasons why board members are not engaged in meetings, but sometimes it’s up to an organization’s staff to find ways to involve board members more in the decision-making process.

Smart Business spoke with Ben Antonelli, CPA, a principal at Rea & Associates, to learn more about what nonprofit organizations can do to increase board member engagement during board meetings.

What are some possible reasons for decreased board engagement?

While a large majority of board members have a passion for their organization’s exempt purpose, they may not be as engaged when it comes to making financial decisions. Maybe the organization’s internal financial reports are not provided in a timely fashion, are too detailed or do not provide narratives to be reviewed prior to meetings.

In order for board members to make sound decisions, they need to be equipped with the right information.

How and when should board members be provided with information?

Board packets and presentations that include financial reports should be available to board members several days before the meeting. Sending out the packet the night before the meeting can put unnecessary pressure on the members, and may make it difficult for them to make educated, well-thought financial decisions during these meetings.

How much detail should be provided in the financial reports given to board members?

Nonprofit organizations should be mindful about the level of financial detail provided to board members. There may be times when they are provided with too much financial data on large spreadsheets. It may be difficult for board members to digest and analyze the information in the time leading up to and during the meeting.

Although detailed financial data should be available to board members upon request, financial statements reviewed during board meetings should be limited to summarized data. In addition (and this varies by organization and industry), relevant metrics or ratios should be given.

This report should show the increase or decrease in various metrics over time, usually multiple years. In order to be meaningful, organizations should use the same report format during all meetings so board members can become familiar with it.

What else should be included in board meeting packets?

  • Show an analysis of the actual budget versus the approved budget or operating plan. Most organizations operate with an approved budget or operating plan. If organizations do not have such a budget, it is critical to create one. For organizations with a budget, showing a comparison of the actual budget versus the approved budget for the past month and the year to date is useful.
  • Provide a brief narrative of financial results. In addition to financial data, a narrative explaining the organization’s analysis of the most recent financial results is also very helpful. Organization staff typically knows much more about the organization than the individual board members, so providing an explanation as to why the numbers are the way they are will help provide a level of context.
  • Disclose the basis of accounting if it is different from generally accepted accounting principles (GAAP). Many organizations that produce annual board-approved GAAP financial statements also produce monthly board reports on a separate basis. If an organization reports this way, a simple footnote or disclosure to the board stating that a different basis exists will help avoid any confusion at the end of the year.

An engaged board can help propel an organization forward, and likewise, a disengaged board can hold it back.

Organizations should give board members the tools they need to be active, strategic and valuable.

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