Untangling tax reform for domestic corporations with foreign subsidiaries

One goal of the Tax Cuts and Jobs Act (TCJA) was to end the lockout effect and encourage U.S. companies to bring back cash held by foreign subsidiaries. It also sought to make the U.S. more tax competitive, so fewer U.S. businesses would move offshore.

“So far, some of the tax system’s new provisions and revisions have had a dramatic impact on domestic corporations with foreign subsidiaries,” says Joseph Calianno, partner and international technical tax practice leader at BDO USA LLP.

Smart Business spoke with Calianno about the tax environment for domestic corporations with foreign subsidiaries.

Which provisions are impacting domestic corporations with foreign subsidiaries?

First, the Internal Revenue Code (IRC) requires U.S. shareholders of certain foreign subsidiaries to pay a one-time transition tax (Section 965) on untaxed earnings, even if those earnings are still offshore.

The act also modified existing rules. The controlled foreign corporation (CFC) anti-deferral rules tax income even if the earnings aren’t repatriated. Going forward, the amount of CFC earnings taxed offshore has significantly expanded under IRC Section 951A, also called Global Intangible Low Taxed Income (GILTI). The rules for determining the GILTI inclusion are complex and require detailed calculations.

However, domestic C corporations (C-corps) may be able to take a new 50 percent deduction on GILTI amounts, subject to special rules and a taxable income limitation. With the reduced corporate tax rate, the GILTI inclusion for C-corps generally would be taxed at a 10.5 percent rate, assuming the full IRC Section 250 deduction applies. C-corps also may be eligible for a foreign tax credit relating to the GILTI inclusion, subject to certain limitations.

Moreover, the TCJA added IRC Section 245A, a 100 percent dividends received deduction (DRD). This participation exemption enables some C-corps that satisfy certain requirements to receive dividends from foreign subsidiaries without being taxed under certain conditions.

How does the TCJA target U.S. base erosion?

With the lower corporate tax rate of 21 percent, the government wanted to prevent base erosion. A new provision, IRC Section 163(j), limits business interest deductions, while the base erosion and anti-abuse tax (BEAT), under IRC Section 59A, imposes an additional corporate-level tax on certain corporations. BEAT is fairly complex but, in essence, it targets corporations making payments to foreign-related parties that reduce the U.S. tax base, when they meet a gross receipts and base erosion percentage threshold.

IRC Section 267A deals with deductions for related-party interest or royalties with hybrid instruments or entities. At a high level, this provision is designed to prevent one party from obtaining a deduction in its jurisdiction, when the other party in its jurisdiction doesn’t include a corresponding amount into income.

What are corporations doing now?

Planning is at the forefront given all of changes to the tax system. These provisions can change behavior to some degree, e.g., how much debt a corporation will incur can be influenced by the ability to deduct the interest. Guidance from the IRS and Department of the Treasury, mostly in the form of proposed regulations, provides greater certainty as to how a provision may operate or how a provision should be interpreted. Corporations are evaluating the impact on their organizational structure and transactions, and considering if they want to restructure or change how they do business.

Do you think tax reform will result in more corporations repatriating cash?

Generally, yes. Many foreign subsidiaries have previously taxed earnings, as a result of the transition tax or CFC anti-deferral rules, that, largely, may be repatriated without additional U.S. tax. This assumes there is sufficient cash in the foreign subsidiary to be repatriated — earnings don’t necessarily equate to cash. Further, the 100 percent DRD can help facilitate repatriation.

However, whether a corporation brings cash home can depend on the need for the cash in the U.S., the need for cash in the foreign jurisdiction for the foreign business, foreign restrictions on the repatriation of cash and foreign withholding taxes.

Insights Accounting is brought to you by BDO USA, LLP

Sales and use tax laws are complex. Here’s how to minimize the risk.

Staying current on sales and use taxes is difficult, as state revenue needs, technology and social attitudes change.

“Sales and use tax laws are complicated. For example, Ohio taxes over 20 categories of services, and several different types of services can fit within each category. Also, the state has over 100 sales tax exemptions, depending on how you count them,” says Stephen Estelle, Tax Manager at Clark Schaefer Hackett. “Then compound that by the laws of each of the 45 states that levy a sales and use tax, which are equally as complex. And no two states are the same.”

Smart Business spoke with Estelle about how to manage sales and use tax compliance.

Why are sales and use tax laws so complex?

Sales and use tax laws balance state revenue needs with economic and social policy. This balance changes as the economy fluctuates, as states need more money or as social attitudes shift, and every state draws different conclusions about what should or should not be taxed.

Technology is also advancing rapidly. When state laws do not change to keep up, tax departments must fit new products and services into old statutory language. This can get confusing. For instance, is cloud computing a good or a service? Where is it located, and which state gets to tax it?

Another factor is the changing intersection between state law and the federal constitution. For example, the U.S. Supreme Court’s recent decision in South Dakota v. Wayfair Inc. held that a business’s physical presence is no longer required for the state to compel the business to collect the state’s use tax. Rather, a business’s economic presence is sufficient. Most states now use a specific number of transactions and/or amount of sales to determine when a remote seller is economically present, but the thresholds can differ from state to state.

What can happen when businesses are non-compliant with these taxes?

State tax departments can conduct sales and use tax audits, just as they conduct income tax audits. If they determine a business has not collected sales tax or self-reported use tax, states can charge interest on the uncollected or unpaid tax and impose penalties.

Penalties vary by state. If a business fails to collect and remit Ohio sales tax, for instance, the civil penalty can be up to 50 percent of the tax. If the business collects Ohio sales tax and keeps it, in addition to a 50 percent civil penalty, the business could be subject to criminal penalties. The person at the business responsible for collecting and remitting tax could also face civil and criminal penalties. If a company is not collecting or remitting sales tax, the statute of limitations in Ohio is 10 years. With use tax, Ohio can go back seven years.

How can business executives minimize their risk of under or over payment?

The first step is education. Business leaders should not start selling into a state, even if it is in the home state of their business, without clearly understanding how the sales tax or use tax laws apply.

With respect to sales tax, complex businesses should consider purchasing sales tax automation software. After the initial set-up, the software automatically incorporates changes in the law. If new products or services are added to the business, they must be integrated into the software.

If a company cannot afford tax automation software, a less expensive approach is to have a tax consultant prepare a cheat sheet that describes when collecting taxes is necessary and when it is not. This information should be updated annually, as well as when business operations change.

On the use tax side, every business should know when vendors should charge tax, as well as which exemptions apply to the business or industry. Each state has different exemptions. When a business expands into a new state, it is necessary to consider these state-by-state tax variations. Using a consultant to navigate these differences can be helpful. For example, accounts payable employees can refer to a summary prepared by the consultant when monitoring vendor invoices. Remember, vendors might also be confused regarding tax requirements.

Because sales or use tax is likely a small amount on each invoice, it may not be top of mind until a business receives an audit letter. A tax consultant can provide critical advice whether the business is handling compliance correctly to avoid future surprises.

Insights Accounting is brought to you by Clark Schaefer Hackett

Weighing the options for implementing the new revenue recognition

As private companies apply the new revenue recognition standard, they have two options for reconciling their 2019 financial statements with those from 2018, which was under the old guidance.

“We told our clients to keep detailed records, so it would be easier to bring the two systems together,” says George Pickard, principal of the Audit and Accounting Service Department at Ciuni & Panichi Inc.

However, no matter how prepared, it’s still burdensome to change how you recognize revenue when you enter into contracts with customers to provide goods or services. That’s why standard setters allow organizations to either retrospectively restate 2018 financial statements or follow a cumulative approach.

Smart Business spoke with Pickard about the benefits to each method, where to get additional implementation help and the need to educate financial statement users.

How should a private company decide which method to follow?

One option is to restate your 2018 financial statements and make changes to your income statement, as if the new revenue recognition standard was in place. Practical expedients to make this easier, include:

  • Completed contracts that began and ended in the same annual reporting period do not need to be restated.
  • For completed contracts with variable consideration, the transaction price at the date of completion may be used, rather than estimating the amounts.
  • The disclosure of outstanding performance obligations and how much revenue is tied to those can be skipped.
  • Retrospective restatement of the contract is not required for contracts that are already modified.

The other option is to cumulatively apply the standard. You keep your 2018 numbers, but you still adjust your beginning equity for 2019. Then, you disclose which line items of 2019 have been affected by the new standard and what they would have looked like under the old guidance.

The decision between the two needs to be taken on a case-by-case basis. Restating makes it easier for financial statement users to look for trends, but it may be time consuming and burdensome. If, for example, you’re planning to sell your company in the near future, the ability to have multiyear comparisons that give a clear picture may be worth the effort. On the other hand, if you have a lot of contracts that are now completed and it will be very difficult go back and get all of the necessary details, the cumulative method may be better.

What assistance is available for implementing the new standard?

Beyond working with your accountant, the American Institute of Certified Public Accountants (AICPA) has come out with audit guides specific to revenue recognition. It also put together task forces that looked at 16 industries and implemented the new standard, giving detailed examples of how to carry out this revenue recognition. If your organization falls under aerospace and defense, airlines, asset management, broker-dealers, construction contractors, depository institutions, gaming, health care, hospitality, insurance, not-for-profit, oil and gas, power and utility, software, telecommunications or timeshares, you should look at these.

The AICPA also is coming out soon with a revenue recognition tool kit.

Why is it critical to educate users of your financial reporting about what to expect?

If banks, stakeholders or shareholders use your financial statements because they loaned you money, you don’t want them to be caught off guard, especially when agreements incorporate covenants. If revenue is recognized earlier or later than it used to be, you may fail a covenant under the new standard.

In addition, some bonus compensation and other agreements with employees are tied to revenue. The new standard may change the timing of revenue reporting, which could change whether people hit a goal. It may be a case of rewriting the agreement or a having conversation upfront with your employees.

The more communication that gets out, the less stakeholders, banks, employees or other users of financial statements will be surprised. You need to share what they should expect to see for the 2019 period, and if you’re issuing interim statements, you’ll want to have those conversations a lot sooner.

Insights Accounting is brought to you by Ciuni & Panichi Inc.

How to find the right professional to perform a business valuation

CPA firms have an advantage over other professionals when it comes to performing business valuations because of their familiarity with all aspects of a business.

“CPAs perform audits and reviews of financial statements, evaluate internal controls, prepare tax returns, and consult on management practices and succession planning,” says Michael E. Stover, CPA/ABV, a director at Brady Ware & Company. “That gives them broad and unique insight into businesses that not many other professionals can claim.”

Smart Business spoke with Stover about the valuation process, the methods used and why CPAs are uniquely qualified to perform them.

Generally, how are business valuations developed?

There are three main approaches to business valuations that need to be considered: market-, income- and asset-based approaches.

A market-based valuation estimates value through analysis of recent sales of comparable publicly traded or privately held companies. Consideration should be given to size, growth, financial condition and operating performance, among other factors.

The income-based approach estimates value based on future or historical cash flows and appropriate returns on capital invested. A rate of return is developed based on a business’ specific risk characteristics. Greater risk in a business demands greater returns, which would equal lower value in relation to the cash flow it’s producing.

The asset-based approach assumes that a buyer would pay no more for a business than it would to purchase the components of the business at market prices. This approach is generally relied upon if the company owns significant tangible assets or if the company has a questionable ability to continue as a going concern.

A business valuation could take into consideration all three approaches, but the availability of information often dictates the method.

What is considered during a valuation and what factors may vary depending on the situation?

Among the first considerations is the appropriate standard of value. One standard is fair market value, which is the value of a business to a hypothetical willing and able buyer and seller who have knowledge of the facts and are not compelled to buy or sell. There is also investment value, which is the value of a business to a specific buyer or seller based on his or her specific set of circumstances. The economy must also be considered. Generally, the values of businesses were lower during the Great Recession compared to values today.

A change in the interest rates can also affect the value of a business — the lower the interest rate, the more expensive a business tends to be.

Valuation also considers risks both in the industry and the company. Risks could include low barriers to entry, limited immediate and long-term growth opportunities, as well as a high concentration of customers and vendors.

What advantage is there to hiring a CPA firm to perform a valuation?

It’s technically true that anyone could perform a valuation. There are boutique firms focused exclusively on business valuations and some attorneys will also provide them.

However, CPA firms have the knowledge and experience required to interpret financial information and make adjustments to reach the most accurate valuation.

In getting a business valued, there’s a lot of information to consider. Ideally, a business will work with someone who is ABV, ASA, or CVA certified. These credentials show that they know what they’re doing and their results can be trusted.

CPAs have a familiarity with businesses like no other professional. Take advantage of that expertise and knowledge to get the best valuation possible.

Insights Accounting is brought to you by Brady Ware & Company

What you need to implement a data analytics program

Data analytics is a generalized term that can be a catch-all for more specific applications including business intelligence platforms, data governance, forensic data analysis, advanced statistical modeling and more.

“Data analytics can empower business leaders to make better decisions, not by replacing intuition or business expertise, but rather by augmenting or supplementing it,” says Jonathan Poeder, Director of Data Analytics at Clark Schaefer Hackett.

Companies face challenges when developing an analytics program. But businesses that do not integrate data analytics into their decision-making process are in danger of being at a competitive disadvantage within their industries. 

Smart Business spoke with Poeder about data analytics programs and what companies need to understand before attempting to implement one.

Why is data analytics important?

Analytics involves shaping data structures into a useful format and applying mathematical techniques to extract meaningful information — to find the signal in the noise.

Storage technologies have become more robust, which means companies can cost-effectively track petabytes of information if needed. Extracting data that can inform decision-making on a specific problem is very challenging and can become a barrier that prevents many companies from attempting to develop analytics capabilities. Business leaders see the value of that information, however, so there’s a strong incentive to pursue methodologies and techniques to identify reliable, data-driven insights. 

How common is it that a company is effectively capturing and analyzing data?

Data analytics, for some smaller businesses, might mean using Excel spreadsheets or utilizing a simple business intelligence platform. Companies can use these tools and grow, but often struggle to transition to something more robust that requires sophisticated expertise to develop and operate. 

Larger businesses tend to have a higher level of sophistication, but they still face challenges. For instance, a business might have a rich database under a third-party platform through which they manage products and services. However, staff often lacks the training or know-how to utilize the full potential of the data.

Code customization that would shape data to enable targeted advanced data analytics is a skill set frequently lacking in organizations. The business is then constrained by what the platform will provide. Regardless of a company’s size, if leadership does not understand and support the value analytics brings to a business, it will stunt the company’s growth potential.

What do companies misunderstand when it comes to data analytics?

Data analytics can seem esoteric. Business owners and executives want data to be more relatable, easier to understand and easier to transform into something meaningful. But it’s a deep and complicated field. The difference between perception and reality can create a disconnect between data analytics experts and the C-suite.

Executives might not understand the level of work that goes into extracting useful data from a database. They also might not understand some of the implications of various findings, or struggle to manage the analyst in ways that allow the analyst to provide data of maximum value to the organization. These are just a few of the reasons that organizations struggle with implementing a data analytics program.  

Who can help a company that wants to better utilize, or implement, data analytics? 

It can be challenging and expensive to get a data analytics program in place and operating effectively — from leadership to infrastructure to talent. Just hiring an analyst won’t cut it. There is a lot more to building the infrastructure, getting the right data, and implementing a data analytics program than just hiring a data scientist. For these companies, the best strategy is to start with an external consultant. Talk to an organization with data analytics expertise to see what options exist to leverage data analytics assets to gain efficiencies and grow.

Insights Accounting is brought to you by Clark Schaefer Hackett

How is your 2018 tax strategy holding up? Use it to plan for the future.

The Tax Cuts and Jobs Act created many changes to deductions. The tax reform increased the standard deduction to $12,000 for single filers and $24,000 for joint filers, while limiting itemized deductions and creating a new qualified business income deduction.

Melissa Knisely, tax department senior manager at Ciuni & Panichi Inc., says it was challenging to plan for 2018 before the end of 2018 and even into the beginning of 2019. Tax advisers didn’t have some of the regulations, so they didn’t know the rules, either.

However, as individual and business returns are being completed, a few trends are beginning to emerge.

“We have been doing a lot of planning around timing of deductions and deferring or accelerating of income. Those are the three biggest things we’re seeing with personal returns,” Knisely says.

The results have been unique to each person’s situation.

“You really can’t make a prediction based on one scenario, like we have been able to do in the past,” she says. “We’ve had to look at everybody’s situation individually. They are all different.”

Smart Business spoke with Knisely about some of the changes under tax reform and how taxpayers can use lessons from 2018 to plan for the future.

Which deduction change is catching business owners and executives off guard the most?

One of the biggest changes is the cap on state, local and real estate taxes. For example, if a taxpayer paid $5,000 of state tax, $2,000 of local tax and then $15,000 in real estate taxes in 2018, they cannot deduct more than $10,000 for all three of those together. Previously they would have been able to deduct all $22,000 of the tax that was paid during the year.

Under tax reform, they may not benefit from all of the tax that was paid during the year and it could cause them to no longer itemize their deductions.

How are fewer itemized deductions affecting other areas like charitable contributions?

Since the cap on taxes may have caused them to no longer itemize deductions, taxpayers may have to adjust other deductions accordingly.

One option is to bunch charitable contributions together, enabling them to itemize one year and take the standard deduction the next year.

Another other option is to pre-fund charitable contributions by setting up a donor-advised fund. They get the deduction in the year that the donor-advised fund is funded and then they are able to direct the contributions to charities from there.

What should taxpayers do to determine which year is best to have more deductions and itemize?

Taxpayers, and their tax advisers, will want to look out a couple of years to try to plan for when they think they’re going to have more income versus when they are not. Does it make sense to accelerate income into the current year or to defer it to the next year?

Many of the changes under tax reform go through 2025, so now that tax advisers have more answers to the questions than they had at year-end planning, they can help taxpayers adjust accordingly.

How can people get a jump on next year’s taxes before they put away the 2018 return?

If in the past they have not owed and now they do, what’s the reason for that? It may be as simple as they didn’t have enough withheld from their paycheck.

Also, if people are waiting to do their returns until later in the year, they may want to accelerate their timing, so they know where they stand. While an extension of time to file may be necessary, taxpayers should try to get that information sooner rather than later.

Insights Accounting is brought to you by Ciuni & Panichi Inc.

You can’t afford to ignore your retirement plan responsibilities

In today’s environment of rising regulatory scrutiny, retirement plan sponsors must keep up with complex legal requirements, while trying to design effective plans that retain employees.

“Regulators such as the Department of Labor (DOL) actively review plan Form 5500 filings for evidence of noncompliance, inaccurate reporting and excessive fees, especially since electronic filing makes it easier to perform queries,” says Tiffany White, CPA, shareholder at Clark Schaefer Hackett. “The DOL can assess significant penalties for late tax filings or fees to go through a correction program to fix qualified plan violations. Worse, penalties can be assessed at a personal level for plan trustees for a breach of fiduciary duty. And in almost all cases, corrections can be costly, time consuming and disruptive to business.”

Smart Business spoke with White about complying with audit requirements and strengthening your retirement plan.

What can employers do to help keep the plan from becoming a liability?

Effective plan governance is the best defense to manage plan risk. So, you should:

  • Establish a plan committee for general oversight, designate an employee as plan administrator to take care of day-to-day plan operations and ensure fiduciary education is provided regularly.
  • Hire qualified service providers to deliver needed expertise. Be sure to assess the quality and level of service as compared to the fees charged. Hiring the right expert protects the plan sponsor and might not mean the lowest-cost provider.

Timely, accurate reporting is vital. Qualified plans need to file a Form 5500 and provide various notices each year. Keep a calendar of due dates, and carefully review draft reports for completeness and accuracy.

Common Form 5500 errors include marking incorrect boxes, providing incorrect data, incorrectly reporting expenses and filing the form late. Also, large qualified plans — generally, plans with more than 100 eligible participants — need to attach audited financial statements. Hiring an auditor experienced in plan audits can help ensure reporting requirements and fiduciary responsibilities are met.

Another best practice is conducting internal checkups. The most common plan audit errors are not following the plan’s definition of eligible compensation to calculate contributions, not implementing auto-enrollment features correctly and not remitting participant contributions on a timely, consistent basis. Circumstances that can increase risk and may require additional oversight and checks of controls include:

  • Changes in third-party administrators (TPAs) or custodians.
  • Changes to payroll companies or adding new earnings codes or fringe benefits.
  • Adding a new division of employees or mergers/acquisitions.

How much can be done in house? How much should be contracted out?

Plan sponsors should determine if they have the internal capabilities. At minimum, have a designated plan administrator to coordinate and work alongside internal human resources and payroll departments and external TPAs, investment advisers, plan auditors and plan attorneys to help keep all parties informed and requirements met.

If external expertise is needed, hire qualified service providers after a thorough evaluation and selection process. The plan sponsor must remember, however, that monitoring service providers is still required as part of the fiduciary responsibility.

How does cybersecurity play in this?

Retirement plans, which have a high level of assets, are a target for cyberattacks. Plus, plan sponsors and service providers utilize personal information, such as Social Security numbers, date of birth, home address, salary, passwords and general payroll information.

Plan sponsors need to consider controls over data not only on the company’s network, but also for every service provider that receives data related to the plan or payroll. This includes obtaining an understanding of the security for data transmissions, how data is stored and how data is protected at each service provider.

A useful resource is the 2016 Department of Labor Advisory Council Cybersecurity Report. Another way to manage risk is through cyber liability insurance coverage, which can help offset some of the significant costs associated with a data breach.

Insights Accounting is brought to you by Clark Schaefer Hackett

Explaining Section 199A, the new qualified business income deduction

The Tax Cuts and Jobs Act of 2017 created a new tax break, Section 199A, where individuals and certain noncorporate taxpayers can deduct up to 20 percent of qualified business income (QBI) on their 2018 federal income tax returns.

It applies to flow-through entities, such as an S corporation, partnership, limited liability corporations and sole proprietorships, where QBI is taxed on the individual, estate or trust return, and subject to higher tax rates. The idea is that with the C corporation rate down to 21 percent, Section 199A allows flow-through entities to operate on a similar playing field.

“Section 199A will reduce the amount of taxes they pay on trade or business income. But it can be a very complex calculation, figuring out your QBI and what limitations apply. It’s not just a simple 20 percent deduction,” says Donna Deist, CPA, MST, senior manager at Ciuni & Panichi Inc.

Smart Business spoke with Deist about how Section 199A will work, now that the IRS has issued the final regulations.

What is considered eligible income?

QBI will include income, gains, deductions or loss from trade or business conducted in the United States. QBI, however, doesn’t include capital gains or losses, qualified dividends, guaranteed payments made to partners, or reasonable compensation paid to owners or taxpayers for their services to that trade or business.

You mentioned that the 20 percent is subject to limitations. What are those?

Once your taxable income exceeds certain thresholds, the 20 percent deduction is subject to limitations. If your taxable income is anywhere between $315,000 and $415,000 for married filing jointly, or $157,500 to $207,500 for all other taxpayers, such as single, head of household, estates, trusts, etc., then you’ll phase out of being able to deduct the 20 percent and will need to phase in the use of the wage and property limitation to determine the amount of the deduction.

Once your taxable income is higher than $415,000 for a joint return or $207,500 for other returns, the wage and property limitation is fully used. To calculate the 199A deduction, you’ll determine which is greater:

  • 50 percent of the W-2 wages for that trade or business.
  • 25 percent the W-2 wages of that trade or business, plus 2.5 percent of unadjusted basis immediately after acquisition (UBIA) of property. (This is directed at those in real estate who usually have much lower W-2 wages, if any at all.)

Then, you must weigh the greater of those two against 20 percent of QBI and take the lesser deduction on your tax return.

In addition, once your taxable income is in this high-income bracket, service providers no longer qualify for the Section 199A deduction. This mostly applies to doctors, lawyers and accountants, but all high-income service providers should check the qualifying list.

How do you think taxpayers will handle the complicated wage and property limitation?

This wage and property limitation requires a complex calculation, but those who have higher taxable income normally work with a tax adviser who can help. People in the real estate business, especially, will have to obtain more information, such as the UBIA, which is basically the cost of the property. However, only some property qualifies.

Even though the pass-through entity doesn’t have to calculate the deduction, it has the responsibility to keep records and report all of the information needed by the owners, shareholders or partners, so they can make the calculations on their returns. That includes W-2 wages and UBIA.

What about when taxpayers have multiple flow-through trades or businesses?

It may be more beneficial for you to aggregate or combine trades or businesses, if they fall within certain guidelines.
Aggregating businesses, however, is not something that can change year to year. Once you elect to aggregate those businesses, until the facts or circumstances of a trade or business change so that it no longer falls in the guidelines of being able to be aggregated, you must continue with that aggregation. You can still add other businesses to that aggregation, though.

This isn’t a decision to be taken lightly. So, carefully consider past activities and future plans with your tax adviser to make the right choice.

Insights Accounting is brought to you by Ciuni & Panichi, Inc.

Retirement plans are undergoing a technology transformation, too

Technology is adding efficiencies in every part of the business world, and retirement plans are no exception.

From an emphasis on cybersecurity, to the ability to use robotics process automation, data analytics and bots to eliminate time spent on collecting, scrubbing and aggregating data, employers need to consider how these new tools can be used in their organization.

“The technology is available, so it’s often a matter of helping people recognize how it could apply,” says Kim Flett, managing director of compensation and benefit services at BDO USA, LLP. “We spend a lot of time educating plan sponsors on what technology is out there now, and we’re only going to see more innovation over the next 10, 15 years.”

Smart Business spoke with Flett about how cybersecurity, automation, data analytics and bots are converging with retirement plans.

Why is cybersecurity so critical for retirement plans?

Retirement plans and the $28 trillion that they currently hold in the U.S. are major targets for cyber hackers. Cybercriminals target entities that manage vast amounts of assets and personal data — two characteristics inherent in retirement plans, which include confidential information like participant Social Security numbers and birthdates.

By law, fiduciaries to 401(k)s and other retirement plans have a duty to act in the best interests of the participant, and protecting sensitive information is part of that job.

What can employers do to improve their data protection?

Retirement plan sponsors and the vendors that service them, like the Fidelities of the world, are increasingly moving to multifactor authentication. This is where people log in with a passcode and then get a text alert where they have to verify the code.

Employers also shouldn’t be afraid to question the cybersecurity of any investment adviser, service provider or third party that touches their retirement plan. The data need to be secure whether it’s stored directly with the employer, at a third-party service provider or while it’s transmitting between the two.

While there’s no way to completely eliminate the threat, employers should:

  • Identify what information could be at risk.
  • Monitor what service providers are doing to address risks at their organizations.
  • Review existing frameworks and current industry developments through resources provided by the American Institute of Certified Public Accountants, the Department of Labor and others.
  • Understand their organization’s broader cybersecurity plan and identify ways it should be tailored to address the unique risks that retirement plans and participants face.

How are automation, bots and data analytics starting to be used with regard to retirement plans?

With retirement plans, there can be a lot of mundane tasks like consolidating data from forms in order to store the 401(k) or payroll records. Bots, which are software robots, can take on these types of tasks.

Employers also may be used to calling vendors and asking a person on staff for a beneficiary or distribution form. Increasingly, the employer or participant may be contacting a virtual assistant, like an Alexa of the 401(k) plan, to get the information they need.

In addition, retirement plans can get complicated when a company has multiple divisions, employers working in different states or more than one payroll company. Data, for example, have to be compiled and sorted and then sent off to the third-party administrator or vendor where the 401(k) plan is invested so that it can do the year-end testing. Thanks to data analytics, programs can be designed to help extract all of that data, so employees don’t have to do data entry or other manual-intensive tasks.

Bots and data tools can become big time savers, so it’s important to investigate how automation might add efficiency to your retirement plan processes.

Insights Accounting is brought to you by BDO USA, LLP

Understanding FASB changes to not-for-profit reporting standards

The not-for-profit reporting model changes from the Financial Accounting Standards Board (FASB), effective now, are the first since 1993 and are intended to address inconsistencies in financial reporting. The changes offer creditors, funders and board members better information regarding the financial status of not-for-profits.

Smart Business spoke with Brian Todd, a shareholder at Clark Schaefer Hackett, about the FASB changes, who they affect and the opportunities they create to tell a better organizational story. 

What is the impact of these changes?

Every not-for-profit will have some type of change to incorporate in their reporting. For example, functional expenses, which break down salaries and occupancy costs, will require more detail to explain how much money serves the organization’s mission and how much goes toward overhead. How not-for-profit executives allocate their time — from mission-critical services to administrative functions — can be subjective. The new reporting model changes will give organizations a chance to describe how they’re allocating those costs.

Another change is liquidity measurement, which is both a qualitative and quantitative disclosure. It’s qualitative in explaining how an organization regularly manages liquid resources and what financial assets it has on hand to fund operations for 12 months. The quantitative aspect is cash, receivables and investments, which are reduced for any restrictions to determine the net liquidity position. 

The classification of net assets is another big change. Before FASB issued the new not-for-profit reporting standards, net assets were classified according to three categories: unrestricted net assets, temporarily restricted net assets and permanently restricted net assets. The new FASB changes collapse these three categories into two: net assets without donor restrictions (formerly unrestricted) and net assets with donor restrictions (which combined temporarily and permanently restricted). 

Why change the reporting model?

Ultimately, the changes were made so that donors and stakeholders could get a better understanding of how funds are used in a specific organization and make better financial comparisons across organizations. Take, for example, a not-for-profit’s statement of functional expenses. Social services organizations were required to report functional expenses at a great level of detail, while other organizations, such as private high schools and chambers of commerce, didn’t need as much detail. The differences in reporting requirements made it hard for donors and other stakeholders to compare organizations across the not-for-profit spectrum. The FASB changes aim, in part, to create consistency while painting a clearer picture of how much money is allocated to an organization’s mission.

Generally, how are these changes expected to affect not-for-profits? 

Not-for-profits will have the chance to provide more clarity around their expenditures with added disclosures and breakouts. Ahead of reporting, they should review how they’re allocating expenses, so they can position their organization in the best light.

The most significant consideration will be liquidity measurements, as those who are looking at these numbers want to know how much an organization has on hand. This will help organizations demonstrate their short and long-term financial strength. The change gives organizations a chance to tell the whole story through liquidity measurements and breakouts. To the same end, it’s also worth having the organization’s board reconsider its reserve policies so that they don’t reflect negatively on reporting. 

What should not-for-profits do to adjust to the changes?

Talk to an accountant. Discuss liquidity measurements and how best to track and break out functional expenses, where financial statements should be updated to reflect changes in terminology, and so forth. 

Rather than fight these changes, embrace them. They offer new opportunities for organizations to share the details of the good work they’re doing. Ultimately, it should make financial reporting easier and clearer for readers, which can lead to more donor engagement.

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