Accounting Topics That Can Trip You Up & Cause You To Go "Oops!"

1. A Global Reach with a Local Perspective
www.decosimo.com
Accounting “Oopsies”
Accounting Topics That Can Trip You Up & Cause You To Go “Oops!”
Jennifer Goodman, CPA, CGMA | Assurance Principal

2.  Sometimes it’s not what you see, but what you don’t
see on the books and records!
 Life insurance policies
 Compensated absences, postemployment benefits
and bonuses
 Stock compensation
 Legal Fees
 General Accruals
 Capitalization Minimums
 FOB Destination vs Shipping
 Deferred Tax Calculations
Accounting Oopsies

3. “Accounting Oopsie”
Sometimes it’s not what you see but what
you don’t see on the books and records
Life Insurance Policies
Comp Absences, Postemployment
Benefits and Bonus Agreements
Stock Awards

4.  The amount that could be realized under the insurance
contract as of the date of the statement of financial
position should be reported as an asset. The change in
cash surrender or contract value during the period is an
adjustment of premiums paid in determining the expense
or income to be recognized under the contract for the
period.
 Determine who owns the policy – NFP industry
 Many of you are on boards of NFP entities. Bring this up at
the next board meeting.
Accounting for key man life insurance

5.  ASC 710 Compensation – a liability should be
accrued for compensation if all of the following:
 Obligation attributable to services already rendered
 Rights vest or accumulate
 Vest – obligation to pay even if employee terminated
 Accumulate – rights may be carried forward
 Modification rule for sick pay where accrual not required but
permitted if rights accumulate but do not vest
 Payment is probable, and
 Amount can be estimated
Compensated Absences

6.  Example – Suzanne has earned but not used 5 days
of vacation and 5 days of sick pay at 12/31/13.
Policy: Vacation and sick days accumulate but will
not be paid if employment is terminated. An
employee can only use sick days due to illness.
 Should vacation and sick pay be accrued at
12/31/13?
 What if new employees have to wait until second year
of employment to take vacation?
 Accrue at current salary rates or salary rates
expected at time vacation is actually paid?
Compensated Absences Example

7.  ASC 712 Compensation – nonretirement
postemployment benefits (ex: severance, salary
continuation, layoff benefits, health care, and
training). Recognize the obligation if all of the
following:
 Obligation attributable to services already rendered
 Rights vest or accumulate
 Payment is probable, and
 Amount can be estimated
Postemployment Benefits

8.  Benefits “accumulate” if it increases with service (not
salary)
 Determine to accrue ratably during the active service
period or accrued in lump at termination.
 Answer:
 Does obligation related to employees services already
rendered?
 Only accrue at point in time earned to date
 Does obligation relate to rights that vest or accumulate?
 No - Don’t need to accrue before employee termination event
 Yes – Is payment probable and can it be estimated? If yes,
accrue ratably during employees active service period
Postemployment Benefits – Accruing

9.  Compensation based attaining a goal over period of
time should be accrued over a period of time in
relation to results achieved.
 Example – Suzanne gets bonus equal to 10% of her
sales for the year over $800,000. Company expects
Suzanne’s sales to be $1M i.e. projected bonus $20k
 What is the accrual at March 31 for $250,000 in actual sales?
 Bonuses not based on formulas should also be
accrued ratably if it is probable they will be paid.
Postemployment Benefits – Bonuses

10.  ASC 718’s measurement objective –
 Determine the fair value of stock-based compensation
at the grant date assuming that employees fulfill the
award’s vesting conditions and will retain the award.
 The fair value of an award –
 Reflect the estimated value that the company would
be obligated to provide when an employee is entitled
to the award and is no longer required to provide
service to the employer.
Postemployment Benefits – Stock Awards

11.  The fair value of stock-based compensation is measured on the
grant date. The following criteria should be satisfied to
establish a grant date:
 A mutual understanding of the award’s key terms and conditions
 The company is contingently obligated to issue shares or
transfer assets to employees who fulfill vesting conditions.
 An employee begins to benefit from, or be adversely affected by,
subsequent changes in the employer’s stock price
 Awards are approved by the board of directors, management, or
both if such approvals are required, unless perfunctory.
 The recipient should meet the definition of an employee (i.e.,
grant date cannot be established prior to first day of
employment) if the award is for employee service.
See employment agreement example
Postemployment Benefits – Stock Awards

12. “Accounting Oopsie”
Accounting for Legal Fees
Capitalize, Expense or Accrue?

13.  Acquisition related costs 805-10-25 (finder’s fees,
advisory, legal, accounting, valuation, and other
professional or consulting fees)
 General rule - expense acquisition fees
 Exception – registering and issuing debt securities
 Capitalize and amortize
 Exception – registering and issuing equity securities
 Paid in capital
Accounting for Legal Fees – Business
Combinations

14. Accounting for Legal Fees - Business
Combination Footnote
Consideration $1,949,000
Identifiable Assets Acquired:
Inventories $ 170,000
Machinery and equipment $1,109,000
Other intangibles $595,000
Total identifiable assets $1,874,000
Goodwill $75,000
$1,949,000
Legal fees expensed in operations $ 157,000

15. Debt treatment
Fees b/t
borrower/lender
Cost incurred
with third parties
Unamortized
cost of old loan
Extinguishment
Accounting Expensed Capitalized Written off
Modification
Accounting
Reflected in debt
premium or
discount Expensed
Leave on books
and continue to
amortize
Accounting for Legal Fees – Debt
Modifications and Debt Extinguishments

16.  You pick your policy!
 Select an accounting policy that provides for either
the inclusion or exclusion of estimated legal fees
 Consistently apply such a policy
 If policy is to include legal fees as part of loss
contingency accrual –
 Costs should be accrued even when the related loss is not
accrued
Accounting for Legal Fees – Loss
Contingencies

17. “Accounting Oopsie”
Timing on When to Record Accruals

18.  A liability has three essential characteristics:
 it embodies a present duty or responsibility to one or
more other entities that entails settlement at a
specified or determinable date, on occurrence of a
specified event, or on demand
 the duty obligates a particular entity, leaving it little or
no discretion to avoid the future sacrifice, and
 the transaction or other event obligating the entity has
already happened
Recording Accruals – General Definition

19. A CPA has been engaged to audit the financial statements
for the year ended 12/31/2013. Is it proper to accrue the
fee as an expense in 2013?
Recording Accruals – Example #1

20. Mgmt. has committed to shut down plant Line 3 and the line is not
operating as of 12/31/13. Half of the equipment will be relocated to
plant Line 2 and half of the equipment is currently up for sale for
50,000. The lessor was notified of bldg. lease termination by year end.
Mgmt. has identified the following costs associated with the shut down:
NBV of equipment $ 1,000,000
One-time termination benefits paid in 2014 $ 50,000
Remaining bldg. lease pits due in 2014
– do not plan to sublease forgoing 40,000 $ 100,000
Estimated equipment relocation/set-up cost $ 200,000
Estimated general cost for shut down $ 75,000
What losses/impairments should be accrued at 12/31/13?
Recording Accruals – Example #2

21. Property held for sale (half of 1,000,000 less FMV) $ 450,000
One-time termination benefits paid in 2014
Assumes employees have been identified,
there is an expected completion date and
employees were informed $ 50,000
Lease (100,000 less sublease value 40,000) $ 60,000
Cannot accrue for relocation costs or “general accruals”.
Commitment to an exit or disposal plan by management does
not, by itself, result in the incurrence of a liability.
Exit and Disposal Cost Obligations can be tricky! ASC 450
Recording Accruals – Example #2

22. “Accounting Oopsie”
Fixed Asset Capitalization Policies and
Capitalization Minimums

23.  For expediency, many entities adopt policies
specifying the minimum cost that a property unit
must have before it is capitalized.
 These policies are acceptable as long as the
minimum is reasonable and, where necessary,
exceptions are made to recognize that such policies
are merely conventions.
Fixed Asset Capitalization Policies

24.  Entity has annual sales of $2.5M
 Net income is $300k
 Total PPE NBV is $4M
Capitalization policy is all tangible property with a
useful life over 1 year is capitalized if purchase price is
over $5k.
Is this policy reasonable?
Fixed Asset Capitalization Policies -
Example

25. Capitalization policy is tangible property with a useful life
over 1 year is capitalized if purchase price is over $5k.
 Entity purchases a nice executive chair for CFO for
$4,999. The $4,999 chair is expensed.
 Entity purchases 100 chairs for training facility at $500
per chair. This $50,000 purchase is expensed.
 Entity remodels CFO’s office and purchases a desk for
$4,000, matching credenza $2,500, matching custom file
cabinets $3,000, chair $4,999 and installation cost of
$501. This $15,000 purchase is expensed.
Did the entity properly account for the furniture?
Fixed Asset Capitalization Policies -
Example

26. “Accounting Oopsie”
FOB shipping vs destination

27.  FOB terms are an important consideration in product
sales, because they determine the point at which title
to the product, and thus the risks and rewards of
ownership, has legally passed to the buyer.
 FOB destination indicates that title to the product
passes upon delivery to the customer.
 FOB shipping point indicates that title to the product
passes at the time of shipment.
FOB shipping point vs destination

28.  FOB terms are an important consideration in product
sales, because they determine the point at which title to
the product, and thus the risks and rewards of
ownership, has legally passed to the buyer.
 FOB destination indicates that title to the product passes
upon delivery to the customer.
 Revenue recorded when it reaches customer
 FOB shipping point indicates that title to the product
passes at the time of shipment.
 Revenue recorded when it ships
VERY IMPORTANT – review your transportation cost terms
and associated agreements carefully but you must also
consider your implicit business practices
FOB shipping point vs destination

29. Products shipped FOB shipping point can generally be
considered delivered when the goods leave the seller’s
premises because the risk of loss is transferred at
shipment and the buyer has the rewards of owning the
product .
 Example: Product is sold FOB shipping point as
indicated on the invoice. However, for this important
customer, the seller has agreed to be responsible for
hiring and paying the shipping agent and insuring the
goods in transit. Can the seller recognize the sale upon
shipment?
FOB shipping point vs destination

30. Products shipped FOB destination are not considered
to be delivered until the goods reach the customer.
 Example: A third party shipping agent rather than the
seller has assumed the risk of physical loss on the
products during transit. Can the seller go ahead and
recognize the sale since they no longer have the risk of
loss during transit?
FOB shipping point vs destination

31. The phrase “synthetic FOB destination” is used when a
vendor offers free-on-board (FOB) shipping point
terms, but also has a standard business practice of
replacing goods that are lost or damaged while in
transit to the customer.
 Example: A company has a implied (not written) policy of
replacing lost or damaged goods results. The contractual
terms specifically state that product is FOB shipping
point. Can the Company recognize revenue at the time
of shipment?
FOB shipping point vs destination

32. “Accounting Oopsie”
Deferred Tax Calculations
See deferred tax example

33. Questions

34. JENNIFER GOODMAN, CPA, CGMA
Assurance Principal | jennifergoodman@decosimo.com
Jennifer Goodman is an assurance principal with more
than 15 years experience in public accounting.
Jennifer provides audit and assurance services, including audits
of internal control over financial reporting, to privately held
businesses, public companies, not-for-profit organizations and
manufacturing and distribution clients. She contributes to the
firm’s manufacturing and distribution team by providing cost
accounting expertise, insights into best practices and specialized
advice regarding internal control issues. Her experience also
includes financial statement audits, audits of internal control over
financial reporting and limited scope consulting engagements for
foreign firms performing assurance engagements for foreign
SEC filers.