Perhaps the only thing worse than a customer whose payments are 60 days overdue is one who notifies you that it is declaring bankruptcy. What you do in the days after a debtor declares bankruptcy has a major effect on what, if anything, you collect.
“It is important to have a general understanding of how bankruptcy can affect your ability to collect an outstanding debt and the steps you should take to maximize that potential recovery,” says Bradley C. Mall, attorney with Munck Carter, P.C. in Dallas. “Even before the current financial crises, we saw a sharp increase in the number of bankruptcy filings.”
In August 2008, bankruptcy filings reached a new high of 4,476 per day. At that time, predictions were that bankruptcy filings would top one million by the end of 2008. Given the current financial times, actual filings are likely to be significantly higher. What is a business owner to do?
Smart Business asked Mall how a business owner should react to a client’s bankruptcy filing.
If I hear that a client is declaring bankruptcy, what should I do first?
The safest thing is to confirm that filing by contacting the debtor and obtaining a case number and/or name and telephone number of the debtor’s attorney. Alternatively, most attorneys can confirm the filing through the bankruptcy court’s online filing system, PACER.
Failing to confirm a filing can have adverse consequences. Not only is any action taken in the pursuit of collection voidable post-filing, such action may open you to monetary liability. Actions taken in pursuit of debt collection — even actions as simple as filing a lien — violate the Bankruptcy Code’s ‘automatic stay’ provisions and are voidable.
What is ‘proof of claim’?
In the business world, to receive payment for services rendered or products supplied, you submit an invoice. In a bankruptcy proceeding, creditors file a proof of claim. You should attach any and all documents that support your claim. For example, if the claim is based on a promissory note, attach the note. If the debt is secured by collateral, attach confirming documents, such as a Uniform Commercial Code Financing Statement (UCC-1). A proof of claim is deemed allowed upon filing with no more action to be taken unless and until an objection is filed as to the claim.
This does not mean that you will receive all or any money from the debtor. Rather, it establishes your claim and its position within the hierarchy of claims payment. You do not have unlimited time to file proof of claim. In a Chapter 7 (liquidation) case, the deadline is usually 90 days after the first meeting of creditors. In Chapter 11 (reorganization) cases, the court sets the deadline.
How do I move up in the payment hierarchy?
Vigilance in the processing and protection of your claim before bankruptcy is filed is key to your position in the hierarchy of claims payment under the Bankruptcy Code. Where your claim falls in terms of payment is entirely dependent upon the classification of your debt prior to the bankruptcy filing. So, if your debt is secured, your claim will have priority, i.e., be paid before general unsecured creditors. This does not mean that your claim will be paid in full, or even at all.
Conversely, failure to properly perfect and record your security interest may cause your claim to be classified as unse-cured, which is close to last in line for payment. Further, because the bankruptcy trustee (or the debtor in Chapter 11 cases) can avoid any transfer of an interest in the debtor’s property (such as filing a UCC-1 or other lien documents) that occurred up to 90 days before the filing, it is important to ensure that you are timely taking the necessary steps to perfect your security interests and thereby protect any potential claim should the debtor file for bankruptcy protection.
What is this going to cost me?
This depends on numerous variables that should be analyzed in considering how best to proceed. Just because a debtor files for bankruptcy protection does not mean you should throw up your hands and write off the debt. Chances are you will not receive 100 cents on the dollar. But, if you take the necessary steps during the course of your everyday business activities to perfect and protect your claim, chances are good that you will receive some return.
In any case, consult a bankruptcy attorney who can explain the process and your options and help you determine an appropriate course of action.
BRADLEY C. MALL is a shareholder with Munck Carter, P.C., practicing in the Litigation Section. His practice focuses on commercial disputes and includes trials, arbitration, mediation and appeals. Reach him at email@example.com.
Allegedly there are two things certain in life: death and taxes. Death is irrevocable. Taxes are subject to change, especially in California, where significant new tax provisions have been enacted into law recently. They range from new net operating loss (NOL) suspension and credit utilization limitations to increased penalties for under-payments of estimated quarterly tax payments. The provisions will not affect all companies, but sorting out which ones they do can be confusing. In some cases, enlisting the help of professional financial advisers might be advisable.
“If a company has the capability to analyze its tax situation, it can do that,” says Gary Hui of Burr, Pilger & Mayer. “But, if it needs outside help, working with professional advisers might save it time, money and aggravation.”
Smart Business spoke with Hui about how and when companies should start preparing for the changes.
Are all California companies affected by the new tax provisions?
No. Corporations with taxable income less than $500,000 in 2008 and 2009 tax years are not affected by the new NOL deduction suspension or credit utilization limitation provisions. The revised California NOL carryover provision will impact all ‘loss’ companies, though. In short, any state NOL generated by a corporation in a tax year beginning on or after Jan. 1, 2008, will have a carryover period of 20 years as compared to 10 years in the prior law. It is especially useful for life science companies due to their long development cycle and regulatory approval process.
Finally, aside from the fiscal impact to a company, the new law will also have impact on a company’s accounting for income taxes for SEC reporting purposes, if the company is publicly traded.
Are all life science companies exempt from the underpayment penalty?
The new 20 percent underpayment penalty, which is in addition to any other existing penalties, specifically targets corporations with unpaid taxes in excess of $1 million in tax years beginning on or after Jan. 1, 2003. With a California corporate tax rate of 8.84 percent, that translates to taxable income of at least $11.3 million. Life science corporations in the development stage are unlikely to have that level of taxable income.
How will these tax provisions affect California companies?
Corporations with taxable income of $500,000 or more in 2008 and 2009 will not be able to use their net operating losses generated in prior years to reduce their taxable income in those years. However, if the corporation has California research tax credits, which is most likely in a life science corporation, it may use the available credit to reduce up to 50 percent of its state tax liability. Consequently, a California corporation with taxable income not less than $500,000 in 2008 and 2009 will have to pay at least 50 percent of the tax liability in those years, even if it may have net operating loss and/or research tax credit carryforwards that would otherwise reduce the CA tax substantially.
When should California companies begin preparing for these tax provisions?
They should start immediately to assess whether the NOL suspension and credit utilization limitation provisions would affect them, since these provisions have direct cash flow impact. Also, if the new 20 percent penalty applies to any of the prior year tax filings, the corporation is allowed up to May 31, 2009, to amend the affected tax return and pay the additional tax to mitigate or eliminate the penalty.
Will these tax provisions have a detrimental effect on California companies if they do not prepare properly for their implementation?
Yes, any underpayment of tax will trigger penalty and interest. Any potential underpayment of tax and the related penalty and interest will have to be included and disclosed in the audited financial statements of a publicly traded company.
Are there any other new tax provisions of which companies should be aware?
Several. The first two quarterly estimated tax installments will carry higher percentages for tax years beginning on or after Jan. 1, 2009. Tax credit may be assigned to other combined group members for them to reduce their tax liabilities in tax years beginning on or after Jan. 1, 2010. In the old law, the tax credit was attached with the combined group member that earned the credit and could not be utilized by other members of the combined group.
Other NOL related provisions do not have immediate cash flow impact on a corporation in 2008. For example, the carryover periods for NOLs generated prior to 2008 are extended by two additional tax years and by one additional tax year for the NOL generated in 2008. A new NOL carryback provision will allow a limited carryback of NOLs generated in a tax year beginning in or after 2011 up to two preceding tax years.
Incidentally, for California LLCs, the payment date of the LLC fee has been accelerated to the 15th day of the sixth month of the taxable year, instead of the 15th of the fourth month of the following tax year.
GARY L. HUI, CPA, is tax senior manager with Burr, Pilger & Mayer. Reach him at (415) 677-3324 or firstname.lastname@example.org.
When it comes to computers and the legal world, things are happening at warp speed. It seems that every week there is new precedent set when it comes to e-discovery. What must corporations keep? Who can see what? Who are the relevant actors?
If attorneys are challenged to keep up with case law, what’s a business owner to do? We turned to Dyan M. House, an attorney with the Dallas law firm of Munck Carter, P.C., to help point us in the right direction.
“E-discovery is a hot topic right now, and it affects everyone in business today,” she says.
There has been a significant number of cases dealing with e-discovery issues, especially since the Federal Rules of Civil Procedure were amended to address issues with electronically stored information (ESI). Those rules went into effect on December 1, 2006.
Smart Business talked to House to find out what businesses need to know about e-discovery.
What is the scope of changes in e-discovery?
In many ways, the issues we are facing with e-discovery are not that different from those involved in discovery of paper documents and other tangible items. However, given the amount of ESI that is created on a daily basis, these issues are compounded. Every day, billions of e-mails are sent and numerous documents and other files are created.
ESI can be found on a broad range of devices and in various media, including live e-mail systems, archive e-mail systems, computer systems (including legacy systems), portable backup media, USB keychain drives, network servers, home directories, shared files, backup tapes/disaster recovery tapes, phones, PDAs and more.
There was a New York case on employment law that set the framework for e-discovery. What does it say?
Zubulake v. UBS Warburg, LLC is generally considered the first definitive case on issues in e-discovery. In 2003 and 2004, the Southern District of New York issued a series of opinions that addressed the scope of a party’s duty to preserve electronic evidence during the course of litigation, a lawyer’s duty to monitor his or her clients’ compliance with electronic data preservation and production and imposition of sanctions for destruction of electronic evidence. The Zubulake court set forth an analysis for deciding disputes regarding the scope and cost of the discovery of ESI. The analysis includes considering the availability of evidence sought from other sources, the extent to which the requests are tailored to obtain relevant information and the importance of issues at stake in the litigation.
The Zubulake and Qualcomm cases both addressed sanctions. What did the courts say?
The Zubulake court noted that the severe sanction of an adverse inference instruction may be imposed when the party seeking the sanction can show that:
1) the party having control over the evidence had an obligation to preserve the evidence at the time it was destroyed;
2) that the evidence was destroyed with a culpable state of mind; and
3) that the destroyed evidence was relevant to the party’s claim or defense. Because the court determined that the employer willfully deleted e-mails, the court granted the plaintiff’s request for sanctions, ordering the defendant to pay costs of re-deposing witnesses with respect to issues raised by the destruction of evidence.
Qualcomm Inc. v. Broadcom Corp. is much discussed because of the egregious nature of the discovery violations and severity of the sanctions. The fact that Qualcomm’s attorneys accepted unsubstantiated assurances that prior searches for relevant documents were sufficient and they ignored numerous warning signs that the document search and production were inadequate, more than 46,000 relevant documents were not produced. Therefore, the court imposed an $8.5 million sanction on Qualcomm and referred the matter to the State Bar of California for investigation.
When am I under ‘reasonable anticipation of litigation,’ and what does this require of my company?
‘Reasonable anticipation of litigation’ is determined when an organization’s relevant people anticipate litigation. When a party is under a ‘reasonable anticipation of litigation,’ the party’s duty to preserve evidence is triggered. This also means that the company’s routine document retention/destruction policy should be suspended and a ‘litigation hold’ should be issued to ensure that relevant documents are preserved. Determining when there is a reasonable anticipation of litigation is a fact-dependent analysis. At the absolute latest, a party’s notice of the filing of a lawsuit is the trigger.
DYAN M. HOUSE is a member of the Intellectual Property Section of Munck Carter, P.C. where she concentrates her practice in the areas of trademark, copyright and licensing. House provides counsel to a variety of businesses including restaurants, retail, engineering firms, software companies and nonprofit organizations on the transactional side as well as preparing for and handling litigation. Reach her at (972) 628-3638 or email@example.com.
Do you think employees leave your company for better pay or more robust benefits? If you answered yes to that question, then you aren’t alone. According to the “2008 Global Strategic Rewards Survey” conducted by Watson Wyatt Worldwide, work-place stress is one of the top reasons employees say they leave organizations, but stress doesn’t even register as one of the top five reasons employers cite as causes of employee resignations. The survey demonstrates that organizations applying an integrated approach to reward and manage talent have an advantage in attracting, engaging and retaining the talent they need to succeed in their markets and outperform peers.
“Some of the myths that employers subscribe to are the reasons why employees come and go,” says Laurie Bienstock, U.S. practice director for Strategic Rewards for Watson Wyatt Worldwide. “Once they understand the impact of stress in the workplace, employers can reshape their employee value proposition and take steps to attract and retain top performers.”
Smart Business spoke with Bienstock about reducing workplace stress.
What are the top causes of workplace stress cited by employees?
According to the survey, employees are most stressed about the day-to-day challenges associated with their jobs, more specifically the increasing expectation to do more with less. Here’s what employees mentioned as the most frequent causes of stress:
- Job definition Unclear or unrealistic performance expectations cause stress, along with unrealistic workloads, inadequate training and poorly defined work processes.
- Work group environment A lack of teamwork and/or a lack of staff to perform their job duties create workplace stress.
- Supervisor Employees were split about how supervisors contribute to work-place stress. Low performers said their supervisor was a cause of workplace stress whereas top performers more frequently cited poorly defined work processes, not their supervisor, as a reason for stress.
In times of economic uncertainty, it’s even more important to ensure employees are engaged and have the resources needed to do their work. If organizations are forced to reduce their work force, they must be careful not to expect the employees left behind to do the jobs of those who have left this creates excessive stress and may impact retention, particularly as the economy rebounds.
What actions have organizations taken to combat stress and which are most effective?
Organizations report taking these steps, with some being more effective than others:
- Strengthen performance management. Clarifying job definition and defining realistic performance expectations through their performance management systems is viewed as highly effective in reducing stress, according to more than half of the survey participants.
- Improve management communication. While many companies have instituted more frequent management communication around corporate goals and the company’s performance, the tactic was not reported as highly effective in reducing stress.
- Re-engineer job processes. Re-engineering work flow and processes was highly effective in reducing stress.
- Improve training. More than half of the surveyed companies increased the availability of employee training, but training was cited as one of the least effective methodologies for combating stress.
- Flexible work schedules. While almost 60 percent of organizations indicate they are making it possible for employees to have a healthy, comfortable balance between work and personal lives, only 50 percent of employees agree. Flexible scheduling is the most common tool employers are using to facilitate work-life balance, with work-at-home/remote policy and adjusted staffing levels common around the world, as well.
Why is an integrated approach to rewards and talent management effective in reducing stress?
An integrated approach ensures that the programs and processes in place at your organization align with your business strategy as well as the needs of your current and future work force. This includes creating and living up to a compelling employee value proposition. By implementing a holistic approach to rewards and talent management that drives business results, aligns pay with performance, promotes healthy work-life balance and integrates employee learning and succession planning, employers drive employee engagement (which reduces stress) and achieve higher productivity.
Are there other benefits for employers?
Employers benefit from other soft cost reductions as a result of lower employee turnover such as decreased recruiting and retraining costs and sustained productivity levels. According to the survey, companies that take an integrated approach to reward and manage talent are less likely to experience problems attracting critical-skill employees (20 percent less likely) and top-performing employees (25 percent less likely); have less trouble trouble retaining critical-skill employees (33 percent less likely) and top-performing employees (18 percent less likely); and are 18 percent more likely to be among the top financially performing organizations.
LAURIE BIENSTOCK is the U.S. practice director for Strategic Rewards for Watson Wyatt Worldwide. Reach her at (415) 733-4311 or firstname.lastname@example.org.
Born: Marin County, Calif.
Education: Bachelor’s degree, mechanical engineering, University of California, Davis; MBA, University of Massachusetts Amherst
Whom have you admired most in business and why?
I’ve always admired John Gardner because he founded the Common Cause and started the American Leadership Forum. He’s a guru on what leadership is all about, and his concepts are at the center of continuous renewal processes. I also admire Peter Drucker because he figured out why the customer is important and taught that concept to managers.
What is the greatest business lesson you’ve learned?
That would have to be that attitude and enthusiasm are so important to success, and every day a person gets to decide what their attitude will be. It’s at the heart of the concept of overdelivering to customers, and the potential for every person on the team to contribute to that result is limitless. The people who know best how to serve the customers are probably already on your team. As a leader, you just have to know how to tap in to that.
Nelson on how to motivate staff:It’s important for any CEO to spend time with the various constituencies, especially the employees, because they want to hear from you. I try to get to all of our locations every 18 months, and I require all of our officers to spend at least 10 percent of their time out in the field. We could be viewed as a very traditional tap water company, but I’ve tried to make this a fun place to work, and I wanted to instill a sense of pride in servicing our customers. As an example, each holiday season the officers dress up, and we serve breakfast to the employees and sing carols to them. It’s just one way that we can not only have some fun but demonstrate our appreciation, and that’s all part of driving customer service excellence.
For Tim Westergren, the epiphany came when he realized how much time he was wasting in meetings that could have been handled without his input.
So the founder and chief strategy officer of Pandora Media Inc. began empowering his 125 employees to make decisions with the fewest number of people necessary.
“It’s contrary to the way a lot of companies are run, where there is a feeling that you’ve got to get everybody involved in every decision so people feel included and so forth,” he says.
The strategy has created a culture in which employees of the personalized online radio company establish strong bonds with the small groups they work with most often.
Smart Business spoke with Westergren about how to improve workplace efficiency and how to implement a major culture change at your company.
Q. How could another leader create a culture like yours?
The first thing that I would do is encourage the executive to take his company’s leaders leaders I would define as anyone who manages a person and dedicate some time off-site. Bring in some professionals and spend some time on the interpersonal part of your company.
Get to know your people and establish a different kind of relationship between you and your staff. It’s more personal and more intimate and open. Then, together, adopt this new approach to make them part of the process.
Then institute it and formalize it within your organization so that it becomes something that every employee goes through. Write it down together, and then the leaders must lead by example.
Q. How do you get to know your employees better?
There are professional management training folks whose profession it is to take teams and help them work together. They have many different methodologies for doing that, but you typically go off-site together, and they take the company through these various exercises where you share your own perspectives. You reveal things about yourself and you do psychological and emotional profiles together that help you understand each other and how and why you interact together the way you do.
It breaks down barriers between people. It’s like the equivalent of a managerial ropes course. You all go off and you bond.
It’s a form of conversation that doesn’t happen casually in the office. It really has to be done and moderated by an outside person.
Most people have a very hard time stepping out of themselves. Everybody brings to these situations their own biases and their own personalities. Very rarely can you actually recognize that.
A professional is good at doing that. And the nice thing about that is they will do it equally for the CEO as they will for a director. They have no bias one way or the other. That’s really important because it creates a level playing field as you start the exercise.
Q. How do you institutionalize the process?
When every new employee comes in, they sit down with every manager of the company and they are educated on those managers’ responsibilities in their departments. As part of that, they sit down with [CEO] Joe [Kennedy] and myself, and we go through Pandora principles. That is where all this sort of pedagogy is articulated.
Then we talk about it. We talk about decision-making not being personal. We talk about making decisions with the smallest number of people possible. It’s kind of like a crash course in the company culture.
It’s not something they’re going to absorb entirely immediately, but it’s a framework that helps them understand how and why the company operates as they get to know the company. It’s like a frame of reference to them.
Then, as part of your responsibility as a management team, you have to manage to that pedagogy. So you are setting up an expectation among employees, and the management team itself has to remind itself to revisit them regularly.
Q. How does employee empowerment benefit the company?
You become much more nimble. So you are able to make decisions quickly, which is important. You also make people’s work lives more efficient because they spend less time on the things they aren’t really needed for.
A lot of time in companies is spent trying to reduce the amount of information you get. This creates, ironically, the opposite problem, because if we err on any side, it’s not giving you enough information.
The flip side of this whole strategy is you have to be very proactive about informing people when you do make decisions especially when you think a decision will impact them. But you don’t have the problem of spending all day long on administrative e-mails and reading stuff that’s just not important to you.
So it saves people time and makes them more efficient, which makes them happier. It also gives people a real sense of ownership.
HOW TO REACH: Pandora Media Inc., (510) 451-4100 or www.pandora.com
Ron Jankov likens his job at NetLogic Microsystems Inc. to that of a firefighter.
For the most part, he lets his people do their jobs, but when there’s an issue, he’s the first one on the scene to respond. So, while he may not be listed under 911 in the phone book, he is willing to drop everything at a moment’s notice to help his people with a problem.
Doing so has helped Jankov, NetLogic’s president and CEO, keep his 250 employees focused on the tasks at hand. As a result, the company reported revenue of $70.7 million for the first half of fiscal 2008, putting it on track for a big bump this year after the fabless semiconductor company posted fiscal 2007 revenue of $109 million.
Smart Business spoke with Jankov about how to keep employees from being paralyzed during times of adversity and why just dropping in on a meeting can be a good idea.
Help people calm down during adversity. You have to kind of thrive in adversity. That’s when you have to stand up and say, ‘If there’s a problem, then I own it,’ and almost kind of appreciate adversity because now you’re needed.
We had a problem about six months before we went public where we won a huge project and then, when we started to supply that program, we had a major manufacturing issue where it was costing us more to build the products than we were selling them to for. I had to go back and get a bridge loan we got like $10 million, and we spent the whole $10 million but we kept the program, and today, they continue to be our largest customer.
A lot of getting through that was just saying, ‘Hey, we can do this. I know I can get the investors to trust me to get through this.’ I had to tell the manufacturing guy, ‘Look, don’t panic; just get this thing fixed in six months. It doesn’t have to be fixed in two weeks because I know that’s not possible.’
Paralysis would stick in if you didn’t do that. The whole thing would just stop because nobody wants to make a decision that’s going to kill the company, so you can make them all comfortable by saying, ‘Hey, you can make the decision, and it’s not going to kill the company. You make the right decision, and I’ll make sure that it doesn’t kill the company.’
Direct your staff and then let them go. Once you have good people, you have to trust them and enable them to make the key decisions that they’re tasked with. If they’re VP of sales, for example, let them make those key calls on pricing and which customers to focus on, which suppliers to use. If you try to overrule them, you won’t keep good people.
It’s a thing you develop with each colleague at a different pace, and essentially you earn a certain amount of trust and understanding with each other. You come to some agreement on the philosophy of how this particular segment of the business should be run, and once you come to an agreement on that philosophy, then they move forward with that agreement.
Step into a meeting and take some ideas and criticism. Be out there listening to what people have to say. You want to just drop in on some meeting and say, ‘What’s this meeting about, how’s it going, do you have the tools you need, do you have the resources you need, what problems are you facing this month, this quarter, what’s your biggest single problem, and maybe there’s something I can do or at least I’m aware of it even if there is nothing specific I can do to help out.’
The most important thing is to be seen as being able to accept criticism and be seen as open to accepting ideas that are not your own. If someone says, ‘We don’t like these tools; why haven’t we looked at this new tool on the market? Everyone says it’s hot; why aren’t we using it?’ We go out and we evaluate the tool, and, if they’re right, we buy it.
If you don’t ever do anything about it, people will stop bothering. But if they see that you act on it and you’re listening, then they know it’s worthwhile that they bring things up and are encouraged to do so.
Drive innovation by explaining your problem. If you go to even the entry-level engineers and you communicate very, very clearly what we’re trying to do and why and how it solves the bottleneck the customer has and they understand the problem, then they’re much more likely to come up with a solution than if you just tell them make it five times faster.
If they understand the bigger picture, they may come up with something that is truly innovative, meaning not just doing it faster than last time but also actually doing it differently because they understand the problem.
If you actually expose the entire situation to the employees and say, ‘Look, the customer thought he wanted this, but based on the latest input, now they need to do something slightly different,’ and if you make it very clear and communicate, then everyone will move forward in this new direction.
They need to feel that they are very close to the decision-making so that they can see the logic behind it and be part of that process.
Born: Long Island, N.Y.
Education: Bachelor’s degree in psychology, University of California at Santa Barbara; master’s of social work degree in community organization, management and planning, Boston University; master’s degree, business administration, University of California at Berkeley
What was your first job?
I worked for my parents. They owned a real estate business. They used to buy places, and I used to fix them up when I was in high school. I learned a lot of things; I could do carpentry, some plumbing, some electrical kind of a little bit of everything.
Then I got a job at a shotgun range. I was a puller a puller was a guy who got on one of these five stations where the shooter comes. When they say pull, you push the button to launch the bird. That was a pretty fun job because you got good tips when the tournaments came. And I learned how to shoot a bit myself.
Whom do you admire most in business and why?
I had a lot of respect and admiration for the leaders I worked for at Sun Microsystems. I thought Scott McNealy was a very charismatic and effective leader in terms of motivating people and being a tough competitor in the marketplace. Sun had a great run while I was there, but I always thought he did a great job of communicating to the employees that they were important, that they were valued, that they would create a positive work environment for us, and that we were going to be aggressive in the marketplace. Instilling confidence and motivating the company were things he was good at.
What advice do you find yourself giving most often?
One of the things I like to tell the engineering teams and my executive team is that, every day you come into work, you need to look at our vision and mission, and say, ‘Is what I’m doing today somehow contributing to that?’ Then you’ll know if your goals and objectives are aligned with the vision and mission. If they’re not or if you’re not clear about how they relate to that, then you’ve got to go to a manager and have that discussion.
Hampered by a steady rise in energy prices, a downturn in the housing market and woes in the credit market, the U.S. economy has been sluggish throughout the first half of 2008. The good news, however, is that despite this confluence of negative economic indicators, the economy has shown growth.
“The U.S. economy has been remarkably resilient,” says Dana Johnson, Comerica Bank’s chief economist. “It has grown nearly 1.5 percent at an annual rate over the first half of the year, despite a rise in energy prices, a fall in housing prices and a consistently disturbed credit market.”
Smart Business spoke with Johnson about his economic outlook for the coming months.
What is your economic forecast for the remainder of 2008 and moving into 2009?
The second half of 2008 is going to look a lot like the first half where growth averaged about 1 percent on an annual rate. As we move into 2009, I see the economy accelerating gradually. Six months from now I think the problems with the credit market will be less intense and the credit crunch will be less evident. I also think by the time we reach the end of the year we will have seen a partial reversal in the runup of energy prices particularly crude oil and gasoline.
We’re beginning to see more evidence that the plunge in building activity is beginning to slow and perhaps the bottoming-out process is underway. The drag from home building is going to become smaller as we move through the second half of the year into 2009. Finally, I think we’re going to continue getting good support to the economy from a narrowing of our trade deficit in real terms. The weakness in the dollar has been underway for about six years and decent growth abroad helps the trade deficit continue to be a source of support for the U.S. economy.
Do you anticipate continued turmoil in the financial and housing markets?
In the near term I certainly do. There are still tremendous concerns about the size of the losses that may result from further defaults, and there is no sign yet of a peak in default rates in mortgages. Until we see clearer evidence that the home price declines are beginning to subside, there is going to be a lot of concern about the condition of financial institutions that, in one way or another, are exposed to the housing market.
California has relied heavily on the subprime mortgage market. What impact will this have on housing prices in the state going forward?
House prices have already declined quite sharply, particularly since last fall, when the credit crunch cut off the flow of new jumbo and subprime mortgages. The decline in home prices has been sharper in California than in most other parts of the country. Over the next year, California home prices are probably going to under-perform against the national average by 10 percent. We are seeing a much more rapid adjustment in home prices in California in this episode than we did in the first half of the ’90s. In the past, adjustments have taken quite awhile, but this one is progressing quite quickly.
Do you expect oil prices to continue rising?
I have given up believing that I can forecast the near-term movements. I do believe that we have been in an overshoot episode. I also believe that any retracement in energy prices is likely to be quite modest compared to the run-up we've experienced over the past six years.
How will this impact the economy as a whole?
The spike in energy prices has created tremendous hardships for any heavy user of petroleum-based products. Overall, the energy price increases have created a drag equal to about $100 billion this year as compared to last year. This figure matches the order of magnitude of tax rebates that people have received. Without the tax rebates there would have been a much more visible impact of the run-up of energy prices on the economy.
One of the bright spots in the current U.S. economy is exporting. Do you expect this trend to continue?
Yes, I do. The dollar has been going sideways since March. It’s beginning to stabilize and when the Fed starts tightening, which I expect to happen sometime next year, I wouldn’t be surprised if the dollar begins to firm a bit. The dollar is very low compared to what it was a year ago, or six years ago, and is creating a good, competitive position for anybody producing goods and services in the U.S. and trying to sell them abroad. Growth abroad has slowed, but not as sharply as it has in the U.S. The combination of growing incomes abroad and the low value of the dollar signals that we will continue to see good growth in our exports in the coming six to 12 months.
DANA JOHNSON is chief economist for Comerica Bank. Reach him at (214) 462-6839 or email@example.com.
Search the Federal Accounting Standards Board (FASB) Web site for information about FAS 109 and you will find 14 pages of technical bulletins, accounting pronouncements, interpretations, opinions and assorted topics. No wonder accountants think it is so complicated. Yet, FAS 109 can be made easier for those who do not work with it consistently and, at times, for those who do.
Satisfying FAS 109 requirements can be simplified, especially if the parties involved listen to one another’s concerns, work together to boil the standard down to its nuts and bolts, and resolve any inconsistencies that exist in the reporting process.
Smart Business spoke to Jim Parks of Burr, Pilger & Mayer LLP about how to demystify FAS 109, access experts and employ effective communications as a tool for the tax provision process.
What is FAS 109?
FAS 109 is an accounting standard that requires that financial statements reflect the tax consequences of all book/tax differences. Its primary objective requires companies to recognize the amount of taxes payable or refundable for the current year and compute deferred income taxes for future tax consequences of events that have been recognized in their financial statements or tax returns.
Why is meeting those requirements so complicated?
It doesn’t have to be. There is no doubt that FAS 109 can be frustrating even for people who work with it regularly. But, satisfying its requirements lies in distilling the tax preparation process into five separate and distinct steps for calculating tax provisions: identify permanent and temporary differences, calculate current income tax expense, calculate deferred income taxes, determine the need for a valuation allowance, and record the calculations on the financial statements.
Following these steps enables someone reasonably proficient in accounting and tax matters to prepare a tax provision. Virtually all tax provisions and software follow these steps in some fashion.
How can companies navigate through the calculations and required documentation?
One way is to follow Edmund Burke’s advice: ‘Good order is the foundation of all great things.’ Building on that premise means including in the process the proper tools and worksheet templates. But they won’t do the trick alone. Tax preparers need a little more to be successful! One path is to partner with trained and experienced preparers, utilize state-of-the-art technology and apply well-defined processes and procedures.
What benefits accrue from following that advice?
Tax provisions prepared by experienced personnel with the proper procedures in place yield better results. Regarding the people process, tax provisions should be prepared by trained and qualified individuals familiar with the local jurisdictions. The preparers could include in-house personnel and outside professionals. It is highly recommended that personnel familiar with the applicable jurisdiction prepare and/or have input on a tax provision. This is particularly important for foreign and state jurisdictions.
What role do technology and processes and procedures play in satisfying requirements?
Adequate technology is essential to a well-prepared tax provision. Companies and their outside accountants demand it. There are several good software programs available to preparers. Many companies, however, use Excel-based programs very efficiently. A world-class software template should be able to address downloading of company financial statements, automatic book/tax difference updates, jurisdictional issues, currency conversions, foreign tax credits, valuation allowances, etc. Additionally, documentation supporting the calculations and technical conclusions reached should be clearly presented and understandable to the reader.
The processes and procedures applied should be used with a high degree of integrity. Any deviation will likely produce unsatisfactory results. Through strict adherence to the tax provision processes and procedures companies can consistently ensure quality. This often entails the use of checklists, flowcharts and internal and external reviews.
Should the tax preparation process be done independently by internal personnel and advisers?
No. Companies need significant coordination among their auditors, outside service providers and internal personnel. Everyone is better served if they are talking ‘on the same page’ two to three times a year. This is one of most important elements of the tax preparation process. It’s also where professionals can excel and provide better services.
The tax preparation process should include a series of meetings among the practitioners that clearly lay out the expectations, time-lines and deliverables, and measure against desired results. A planning meeting maps out expectations. A post-review meeting is essential to obtain feedback, which enables everyone involved to adjust accordingly and learn.
Systemic coordination of the tax provision process is a key element to success. It’s a function of consistently improving upon what works the best. And, it doesn’t hurt to listen to what others have to say.