Original air date: June 26, 2017 Rebroadcast and recording info at http://www.mhmcpa.com This quarterly webinar will bring you up-to-date on hot topics, technical matters and current events impacting financial reporting and the accounting profession. Professionals from CBIZ and MHM will discuss recent happenings at the Financial Accounting Standards Board, American Institute of Certified Public Accountants, Securities and Exchange Commission, Public Company Accounting Oversight Board and other relevant governance bodies. We will also touch on recent tax changes and proposed legislation.

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CBIZ & MHM
Executive Education Series™
Second Quarter Accounting and
Financial Reporting Issues Update
Mike Loritz, Mark Winiarski, Nate Smith
June 26, 2017; Rebroadcast July 17, 2017

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About Us
• Together, CBIZ & MHM are a Top Ten accounting provider
• Offices in most major markets
• Tax, audit and attest and advisory services
• Over 2,900 professionals nationwide
A member of Kreston International
A global network of independent
accounting firms
MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting,
tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms.

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Before We Get Started…
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CPE Credit
This webinar is eligible for CPE
credit. To receive credit, you will
need to answer periodic
participation markers
throughout the webinar.
External participants will receive
their CPE certificate via email
immediately following the
webinar.

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Disclaimer
The information in this Executive Education Series
course is a brief summary and may not include all
the details relevant to your situation.
Please contact your service provider to further
discuss the impact on your business.

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Presenters
Mike has 20 years of experience in public accounting with diversified
financial companies and other service based companies, including
banking, broker/dealer, investment companies, and other diversified
companies ranging from audits of public entities in the Fortune 100 to
small private entities.
He is a member of MHM's Professional Standards Group, providing
accounting knowledge leadership in the areas of derivative financial
instruments, financial instruments, share-based compensation, fair
value, revenue recognition and others.
816.945.5611 • mloritz@cbiz.com
MIKE LORITZ, CPA
MHM Shareholder

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Presenters
Located in our Kansas City office, Mark is a member of our Professional
Standards Group (PSG). Mark's role includes instructing in our national
training program, presenting as a subject matter expert at webinars and
conferences, and preparing MHM publications on accounting and
auditing issues.
As a PSG member, Mark consults with clients and engagement teams
across the country in many areas of accounting and auditing. Mark has
served clients as an auditor, consultant and advisor in numerous
industries including manufacturing, distribution, mining, retail sales,
services and software.
816.945.5614 • mwiniarski@cbiz.com • @KCWini
MARK WINIARSKI, CPA
MHM Shareholder

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Presenters
Nathan Smith is a Director in the CBIZ National Tax Office, bringing over
19 years of experience in public accounting to provide technical support
and strategic solutions for the firm’s tax practice. Nathan leads the
development of practice aids and tactical approaches used in
responding to industry and Federal tax developments in a variety of
subject matter areas. Nathan also consults nationally to facilitate
delivery of client service opportunities and solutions, contributes as an
author and editor to the firm's tax thought leadership publications and
assists with the development and implementation of national tax
policies and procedures.
727.572.1400 • nate.smith@cbiz.com
Nate Smith
CBIZ National Tax Office

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Agenda
Accounting Standards Updates
02
01
04
Audit Standard Update
Income Tax Concerns from New Revenue Recognition Guidance
Questions05
03 Transitioning to New Standards

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ACCOUNTING STANDARDS UPDATE

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The calm before the
storm?
6 projects in initial
deliberations
10 research projects
18 other projects

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•Elements
•Measurement
•Presentation
•Disclosures – Board’s Decision Process

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Research
• Intangibles
• Distinguishing Liabilities from
Equity
• Financial statements for not-for-
profit entities
• Inventory and cost of sales
• Subsequent accounting for
goodwill
• Financial performance

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ASU 2017-10 Service Concession Arrangements
• Accounting for public private partnerships
• Not property plant and equipment
• Not a lease
• Revenue, where the grantor (government) is the
customer

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ASU 2017-10 Service Concession Arrangement
• Effective Date
• Upon adoption of Topic 606 Revenue from Contracts with
Customers, or
• Annual periods, including interim within, beginning after
December 15, 2017 (Public business entity)
• Annual periods beginning after December 15, 2018 (all
others)
• Early adoption permitted
• Modified retrospective of retrospective approach

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ASU 2017-09 Stock Compensation
When is a change a modification?
• Whenever terms and conditions change except if the
following are the same before and after the change:
• Fair value
• Vesting conditions, and
• Classification (equity vs. liability)

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ASU 2017-09 Stock Compensation
• Effective annual periods, including interim periods
within, beginning after December 15, 2017
• Early adoption permitted
• Prospectively applied

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AUDIT STANDARDS UPDATE

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PCAOB Auditor Reports
• The Auditor’s Report on an Audit of Financial Statements When
the Auditor Expresses an Unqualified Opinion
• Reorganize the report to place the opinion paragraph
first
• Insert “whether due to fraud or error” as part of the
auditors responsibilities
• Include the year the auditor started to serve as the
company's auditor
• Require reporting critical audit matters (CAMs)

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PCAOB Auditor Reports
• Critical Audit Matters (CAMs)
• Communicated (or required to be communicated) to
the audit committee, and
• Relate to accounts or disclosures material to the
financial statements, and
• Involve challenging, subjective, or complex auditor
judgement
• Scope exceptions for:
• Brokers & Dealers
• Certain investment companies
• Benefit plans
• Emerging growth companies
(ECGs)

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PCAOB Auditor Reports
• Effective date
• Revised report wording and presentation applied for
years ending on or after December 15, 2017
• Reporting of CAMs:
• Large accelerated filers audits for years ending on or after
June 30, 2019
• All others audits for years ending on or after December
15, 2020

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PCAOB Proposal – Auditing Estimates
• Address continued audit deficiencies
• Testing of data used by companies
• Evaluation of reasonableness of significant assumptions
• Understanding third-party pricing information
• Process understanding for fair value merriments in
broker & dealer audits

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PCAOB Proposal – Auditing Estimates
• Improvements:
• Devote greater attention to potential bias
• Align auditing requirements for all estimates, including
fair value
• Integrate risk assessment standards
• Improve clarity and specificity

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PCAOB Proposal - Specialists
• Address identified issues
• Diversity in practice
• Audit deficiencies
• Evaluating assumptions of company specialists
• Consideration of contradictory evidence’
• Improvements
• Enhanced requirements for use of a company’s
specialist
• Risk-based approach for supersizing auditors specialists

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TRANSITIONING TO NEW STANDARDS

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When it rains…
…it pours
• Consolidation (December 31, 2018)
• Revenue recognition (December 31, 2019)
• Leasing (December 31, 2020)
• Financial Instruments
• Recognition and Measurement (December 31, 2019)
• Credit Losses (December 31, 2021)
The above dates are calendar year private company effective dates.

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Managing Transition – Key Considerations
• Develop a timeline
• Staffing
• Project resources
• Training
• Risk assessment
• Scoping implementation
• Internal control and technology
• Fraud risk

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Consolidation Proposal – Transition Challenge?
• Proposed changes:
• Common control scope exception
• Service provider fees as variable interests
• Related party rules
• Comments are due September 5, 2017
Adoption would be required at the same time as the new
consolidation guidance (ASU 2015-02) if not yet adopted

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Revenue Recognition – Transition Issues
• Consultations with the Office of the Chief Accountant
(OCA)
• Identifying the contract
• Identification of performance obligations
• Measuring progress
• Uninstalled materials

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Revenue Recognition Transitioning Terminology
• Completed contracts
• A contract for which all (or substantially all) of the revenue
was recognized prior to initial application
• Retrospective application
• ~25% of public companies
• Modified retrospective application
• ~75% of public companies

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• Retrospective:
• Modified Retrospective:
*Disclosure of difference from Topic 605 is required
1 Adjust opening retained earnings
*Disclosure of changes under Topic 606 is required
1 Adjust opening retained earnings
Financial Statements
Yearend December 31, 2019 and 2018
2019 2018
Reported based on: Topic 606 Topic 606*1
Financial Statements
Yearend December 31, 2019 and 2018
2019 2018
Reported based on: Topic 606*1
Topic 605

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• Modifications
• Treat all modifications prior to the earliest period presented
under the new standard as part of the original contract for
purposes of:
• Identifying satisfied and unsatisfied performance
obligations
• Transaction price
• Allocation of the transaction price
Choices on Transition

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Choices on Transition
• Modified retrospective
• Apply to all contracts, or
• Apply to all contracts that are not completed
• Full Retrospective
• Do not apply the standard to contracts completed in the same
annual reporting period
• Use hindsight to determine transaction price for completed
contracts with variable consideration
• Do not disclose the amount of transaction price allocated to
remaining performance obligations (public business entity
benefit)

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Choosing a Transition Method
• Is there a large impact that affects comparability?
• Multiple accounting methods
• Does the allocation of transaction price to contract
modifications distort timing of revenues?
• Catch-up adjustments
• Lost revenue
• Double expenses

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Lost Revenue
• Acceleration of revenue
• Software company sold a license in 2018 for $1,000,000 and
recognizes revenue over two years under Topic 605
• Under Topic 606 revenue is recognized at a point in time

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Financial Instruments – Recognition and Measurement
• Key impacts
• Investments in equity instruments are accounted at fair
value
• Except for equity method investments
• Practicability exception
• Various disclosures and presentation items
• Transition
• Cumulative catch-up, except
• Prospectively for equity investments measured under
the practicability exception

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INCOME TAX CONCERNS FROM NEW REVENUE
RECOGNITION GUIDANCE
Nate Smith, CBIZ National Tax Office

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Topics for Today
• Tax concerns raised as a result of new revenue
recognition standards
• Revenue recognition rules for tax purposes
• Preview of inconsistencies between new revenue
recognition standards and existing tax rules
• Impact on businesses with contracts for advance
payments and deferred revenue
• Potential actions to be required from all businesses
impacted by new revenue recognition standards

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Tax Concerns Emerging From Topic 606

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Tax Concerns Emerging From Topic 606
• Adoption of the new standards may create or
increase differences between financial accounting and
tax accounting rules
• Presently, there is uncertainty as to whether the new
standards are permissible methods of accounting for
tax purposes
• There is also uncertainty regarding the need and
extent of procedures that businesses must use to
secure permission to change tax accounting methods
as a result of the new standards

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Tax Concerns Emerging From Topic 606
• Specific concerns were raised by the IRS in Notice
2017-17, published in April:
• To what extent would using the new standards result in
acceleration or deferral of revenue for tax purposes?
• What industry and/or transaction-specific issues might
arise for tax purposes as a result of the new standards?
• To what extent do the new standards conform with tax
accounting rules for revenue recognition?
• Are there situations that conformity with the new
standards for tax purposes would be permissible, even
though tax accounting rules otherwise do not conform
(for example, where income is always accelerated)?

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Tax Concerns Emerging From Topic 606
• Procedural concerns also raised by the IRS:
• When there is a cumulative effect of change in
accounting principle, should all businesses be required
to take into account conforming “catch-up”
adjustments for tax purposes, or should certain small
businesses be permitted to complete the recognition
cycle for previously existing contracts on the former
method?
• To what extent should businesses be required to secure
IRS permission to change tax accounting methods?
• How robust should the filing request package be?
• Should certain requests require “advance consent”?
• Can multiple changes be made on the same application?

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Revenue Recognition Rules for Tax Purposes

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Revenue Recognition Rules for Tax Purposes
• Under the accrual method, revenue is recognized when all
events have occurred to give the taxpayer a fixed right to
the revenue, and the amount of such revenue is
determinable with reasonable accuracy (all events test)
• “All events” occur at the earlier of the time such revenue
is due, paid, or earned through required performance
• For the sale of goods, this normally occurs when the
purchaser assumes the benefits and burdens or ownership
under the terms of the contract (benefits and burdens test)
• For the sale of services, this normally occurs as the
performance of services is considered complete under the
terms of the contract (performance test)
• In either case, earlier recognition is required if revenue is
due or paid from the buyer at an earlier date, unless an
exception is available (such as for advance payments)

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Revenue Recognition Rules for Tax Purposes
• Inclusion of amounts earned through passing benefits and
burdens of ownership to buyer
• Passage of title under Uniform Commercial Code generally is
determinative
• Contractual terms could alter the determination
• Inclusion of amounts earned through performance
• The performance of services is considered complete when
all services are provided (except for “ministerial” duties),
not incrementally as progress performance is made
• Services can be “severable” under contractual terms,
whereby performance is then measured against each
severable portion

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Revenue Recognition Rules for Tax Purposes
• Bundled contracts for the provision of goods and
services are respected under the specific terms of the
contract, both in terms of identifying the separate
elements and of establishing price allocations
• Buyer and seller are bound by the contract terms and
neither can take an alternative position (only IRS can
challenge)

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Revenue Recognition Rules for Tax Purposes
• Tax accounting for advance payments
• Timing of revenue recognition is governed by the all events
test by default, which for advance payments requires
recognition in the year of receipt (or when due)
• Under Rev. Proc. 2004-34, a limited deferral is permitted
• Revenue must be recognized by the tax year subsequent to the
tax year of receipt
• Conformity with financial reporting is required
• Deferrals continuing beyond the above period for financial
reporting must be recognized for tax purposes
• Covers advance payments for goods and services; certain
other prepayments ineligible (e.g., rent, interest, insurance)

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Preview of Inconsistencies Between New Standards and
Tax Rules

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Inconsistencies Between New Standards and Tax Rules
• Bundled contracts
• New standards require delineation of performance
obligations among distinct goods and services that must be
accounted for separately
• Delineation based in part on whether the customer can
benefit from the good or service on its own or together with
other resources that are readily available to the customer
• Sales price is allocated among each separate performance
obligation using the seller’s relative stand-alone selling prices
for each distinct good or service
• Tax rules specify that contractual terms are used to
determine the separate elements of a bundled contract and
the price allocations among those elements
• Although these inconsistencies also existed under the
former standards, the new standards have farther reach

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Inconsistencies Between New Standards and Tax Rules
• Variable consideration
• Seller’s right to bonuses or incentives, or seller’s concession
for discounts, refunds, etc. must be estimated under the
new standards to include amounts that are probable to be
collected
• 70%-80% probability threshold generally required
• Former standards did not permit estimation
• Under tax rules, all events must occur to give the seller a
fixed right to the revenue, generally at the earlier of the
time such revenue is due, paid, or earned through required
performance
• Since contingencies must be estimated under the new
standards, a fundamental inconsistency has now emerged

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Inconsistencies Between New Standards and Tax Rules
• Measuring Satisfaction of Performance Obligations
• New standards specify that revenue is recognized when or
as buyer takes “control” of the good or service
• Obligations must qualify for recognition over time, and when
they do, generate progress revenue incrementally
• Obligations recognized at a single point must consider
nonexclusive factors including transfer of title, possession,
risks and rewards of ownership, and others
• Tax rules provide that the benefits and burdens test is used
for the sale of goods to determine revenue recognition,
which will either refer to transfer of title or contractual
terms
• Tax rules provide that revenue is recognized over time based
on contractual terms, and further, that revenue is
recognized only when performance is complete, not
incrementally as performance is rendered

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Impact on Businesses with Contracts for Advance Payments
and Deferred Revenue

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Businesses with Advance Payments and Deferred Revenue
• When the all events test requires tax recognition earlier
than performance (such as when revenue is due or
collected earlier than performance), a common
alternative allows for a limited deferral, irrespective of all
the events test, but only to the extent of financial
conformity
• Where the new standards require incremental progress
revenue recognition, revenue is anticipated to be
recognized faster than before
• Required tax conformity results in an unfavorable outcome
• Where the new standards require additional variable
consideration to be recognized before a seller’s right to it
is unconditional, faster recognition is again anticipated
• Required tax conformity results in an unfavorable outcome

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Businesses with Advance Payments and Deferred Revenue
• Where the new standards require time value of money
accounting to be applied when implied or express
financing elements are part of contracts, faster
recognition can result via periodic inclusion of interest
income
• Apparently, no comparable rule is enforced for tax purposes
in the case of service contracts (comparable rules are
applied to the sale of property, and for the use of property)
• As a result, periodic interest income recognized for service
contracts under the new standards will result in an
unfavorable tax outcome when tax conformity is required
• In summary, some deferral is better than none for tax
purposes, but the deferral will be shorter in many cases

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Potential Actions Required For Tax Purposes By Businesses
Impacted Under New Standards

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Actions Potentially Applicable for Tax Purposes
• IRS consent is required using Form 3115 before a
business can change its overall tax method of
accounting, or its tax method of accounting for a
material item
• Under regulations, a change in the method of
accounting that is employed in keeping internal books
requires IRS consent before the same method can be
employed for tax purposes
• As such, regulations would seem to require any
business that experiences a change resulting from the
new standards to secure IRS consent, where tax
conformity is desired

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Actions Potentially Applicable for Tax Purposes
• For example, a business previously using the deferral method for tax
purposes concerning advance payments will need to secure IRS
consent to change its tax accounting method, even if the deferral
method will continue to be used for tax purposes, because such
business will be conforming to a different financial reporting method
as a result of the new standards
• IRS recently requested comments in Notice 2017-17 on the
procedures for businesses to obtain consent to change accounting
methods as a result of the new standards, and to identify areas
where the new standards are inconsistent with existing tax rules
• Variable consideration
• Partially-complete service contracts
• IRS proposed an automatic consent procedure to give taxpayers
consent, which suggests that a large volume of applications are
anticipated

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Actions Potentially Applicable for Tax Purposes
• These topics will be featured in an upcoming EES
webcast
• The tax rules will be explored in greater detail
• A summary of the new financial reporting standards
will be explained
• A comparison between the tax rules and the financial
reporting standards will be made to clearly articulate
inconsistencies
• Requirements for businesses to file applications for
change in accounting methods will be explored,
together with alternative planning ideas that may now
be desirable in light of the effect the new standards will
have on tax revenue recognition

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?
QUESTIONS

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If You Enjoyed This Webinar…
Upcoming Courses:
• 6/28 & 7/21: Financial Instruments – Preparing for the New FASB Requirements
• 7/20 & 8/10: Are You Leaving Too Much on the Table? Tax Saving Strategies for
Growing Businesses
• 7/24 & 7/31: The Taxing Element of the New Revenue Recognition Guidance
• 7/26 & 8/3: The New Leasing Standard – Your Questions Answered
Recent Publications:
• Changes May be on the Way for Public Company Audit Reports
• Share-Based Payments Receive Some Accounting Clarity
• How to Navigate Complex Debt and Equity Transactions
• FASB Revisits Accounting for Premiums on Callable Debt Securities

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MHM CBIZ

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THANK YOU
CBIZ & Mayer Hoffman McCann P.C.
cbizmhmwebinars@cbiz.com