Salt Lake City, Utah

December 13, 2019

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Accounting Update

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With You Today

WENDY HAMBLETONNational Assurance Partner

(312) 616-4657whambleton@bdo.com

TOMMY JENSENAssurance Partner

(801) 456-5124TCjensen@bdo.com

MATT MCREYNOLDSAssurance Partner

(801) 456-5132mmcreynolds@bdo.com

BRAD TOONEAudit director

(801) 456-5126btoone@bdo.com

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FASB Update

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ASU 2019-10 amended the effective dates for several existing ASU’s as follows:Credit losses Public business entities that meet the definition of an SEC filer, excluding

entities eligible to be SRCs as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years

All other entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

Hedging Entities other than public business entities for fiscal years beginning after

December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.

Effective Dates – ASU 2019-10

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Leases: Public business entities; not-for-profit entities that have issued or are conduit

bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market; and employee benefit plans that file or furnish financial statements with or to the SEC for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (no change)

All other entities for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.

Effective Dates ASU 2019-10 (cont.)

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A major update would first be effective for bucket-one entities, that is, public business entities that are Securities and Exchange Commission (SEC) filers, excluding entities eligible to be smaller reporting companies (SRCs) under the SEC’s definition. The Master Glossary of the Codification defines public business entities and SEC filers.

All other entities, including entities eligible to be SRCs, all other public business entities, and all nonpublic business entities (private companies, not-for-profit organizations, and employee benefit plans) would compose bucket two. For those entities, it is anticipated that the Board will consider requiring an effective date staggered at least two years after bucket one for major Updates.

Generally, it is expected that early application would continue to be allowed for all entities.

Effective Dates – General Approach for the Future:

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Pronouncements Effective in 2020

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ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement Summary: Improves/clarifies disclosures related to fair value measurements required under ASC 820.

Modifications

1. Nonpublic entities: Replaces rollforward of Level 3 measurements with information about transfers into/out of Level 3 and purchases/issues of Level 3 assets and liabilities.

2. Requires disclosure of timing of liquidation of investee assets and date restrictions from redemption lapse related to investments in entities that calculation NAV only if investee has communicated timing.

3. Clarifies that measurement uncertainty disclosure relates to uncertainty in measurement as of the reporting date.

Additions (For public companies only)

1. Disclose changes in unrealized gains/losses included in OCI for recurring Level 3 measurements held at the end of the reporting period.

2. Disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Certain alternatives apply.

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ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement Removals

1. Amount of and reasons for transfers between Level 1 and Level 2.

2. The policy for timing of transfers between levels.

3. The valuation processes for Level 3 fair value measurements.

4. Nonpublic entities: changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period.

Effective Date:

All entities* - FYs beginning after Dec. 15, 2019

* An entity is permitted to early adopt all disclosure requirements in the ASU or early adopt only the removed and modified disclosures and delay adoption of the additional disclosures until their effective date.

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ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract Summary: Requires a customer in a hosting arrangement (service contract) to apply the guidance on internal-use software to determine which implementation costs to recognize as an asset and which costs to expense.

Key Amendments: Customer must determine whether an implementation activity relates to the preliminary project

stage, the application development stage, or the post-implementation stage.

Costs for implementation activities in the application development stage will be capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages will be expensed immediately.

Additional guidance on how to assess capitalized costs for impairment and appropriate presentation of capitalized costs and related amortization.

Effective Dates: Public business entities - FYs beginning after Dec. 15, 2019

All other entities – FYs beginning after Dec. 15, 2020

Early adoption is permitted

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ASU 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities (VIEs)Summary: Improves application of the consolidation guidance for targeted areas.

Key Amendments:

Private company alternative – private companies may elect not to apply VIE guidance to legal entities under common control (including common control leasing arrangements) if both the parent and the legal entity being evaluated for consolidation are not public business entities.

Clarifies that indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests, consistent with how indirect interests held through related parties under common control are considered for determining whether a reporting entity must consolidate a VIE.

Effective Dates:

Public business entities - FYs beginning after Dec. 15, 2019

All other entities – FYs beginning after Dec. 15, 2020

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Background

ASU 2016-13 – Measurement of Credit Losses on Financial InstrumentsASC 326 / ASU 2016-13

Issued June 2016

A Transition Resources Group

has issued nonauthoritative

guidance on practice and

implementation issues

4 Amendments

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ASC 326 / ASU 2016-13In Scope

Financial assets measured at amortized cost: Trade Receivables Loans Contract Assets Reinsurance Receivables Held-to-maturity debt securities Financial Guarantees

Net Investment in leases recognized by a lessor

Off Balance Sheet loan commitments, standby letters of credit, Financial Guarantees

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Out of Scope

Loans made to participants by

defined contribution employee benefit

plans (962)

Equity securities (321)

Pledge receivables of a not-for-profit

entity

Related party loans and receivables between entities under common

control

Policy loan receivables of an insurance entity

(944)

Equity method investments (323)

Derivatives (815)

Operating lease receivables (842,

ASU 2018-19 clarified)

Financial assets where Fair Value Option elected

(820)

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The Current Expected Credit Loss (“CECL”) Model creates three significant shifts from the current incurred loss model:

Primary Changes in the New CECL Model

which requires the utilization of future information, and supportable forecasts to estimate ALLL levels

FORWARD LOOKING ANALYSIS

which requires you to forego worst-case and best-case scenario and evaluate the possibility that a loss exists or does not exist

REMOVES “PROBABLE” THRESHOLD

from the current 12 to 18 month horizon to the lifetime of the asset. This is broadly expected to expand the horizon used for estimating the ALLL.

LOSS HORIZON CHANGES

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CECL –Objective

Reduce amortized cost to amount expected to be collected via valuation account. Off BS commitments will be a liability.

Expected credit losses shall be measured over: Contractual term, considering estimated payments Contractual term shall not be extended for

• Expected extensions and renewals unless they are in the original agreement and are not unconditionally cancelable (ASU – 2019-04)

• Expected modifications, unless TDR anticipated

No minimums or triggering events

Not required to record a loss when the risk of nonpayment is zero

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CECL –Information to Consider

CECL requires estimates of expected credit losses based on internally and externally available information Past events Current conditions Reasonable and supportable forecasts- cannot solely rely on past events

• Qualitative and quantitative factors specific to borrowers and the economy Reversion – beyond reasonable and supportable period revert to historical loss

experience

CECL does not mandate specific approaches or policy decisions to determine expected credit losses

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Key Steps to Consider for CECL Model

Historical Loss

Information

Reasonable, Supportable Forecasts

Reversion to History

Current Conditions

Expected Credit Loss

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CECL –Zero Risk of Loss vs. Remote Risk of Loss

Zero risk of loss- No reserve required when no history of loss and no expectation of nonpayment US Treasury securities Cannot assume zero loss if asset is secured by collateral and collateral value exceeds

amortized cost basis. (Except for practical expedients)

An entity’s estimate of expected credit losses should include a measure of the expected risk of credit loss even if that risk is remote, regardless of the method applied to estimate credit losses.

The FASB concluded that a ‘bright-line’ approach would be inappropriate for all facts and circumstances and decided not to provide explicit guidance on what specific assets are appropriate for zero credit losses.

**It will be rare to have zero risk of loss.**

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Trade Receivables

Companies typically apply an allowance

for doubtful accounts based on historical

losses by aging categories

Under CECL, companies will have to consider whether such historical data

requires adjustment, including upon

recognition of the receivable

Will likely result in recognition of

allowance for credit losses for receivables that are not yet past

due

Individually significant balances with

historical zero loss will most likely

require a loss factor.

The standard applies to receivables that result from revenue

transactions, even if a non-customer party

will make the payment

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ASU 2016-02 LeasesIntroduction

Lessees Right of use model – recognize ROU asset and lease liability at inception for all

leases• Optional exemption for leases with terms < 12 months

Classify all leases as finance or operating (5 criteria)• Finance lease – lessee effectively obtains control of underlying asset• Operating lease – lessee does not effectively obtain control of underlying

asset Similar balance sheet impact; different income statement and cash flow results

ACCOUNTING STANDARD

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Introduction

Lessors Classify all leases as sales-type, direct finance, or operating (similar to existing

U.S. GAAP) based on same criteria as lessees, plus a few others• Sales-type lease - transfers all risks and rewards, plus control of underlying

asset, to lessee• Direct financing – transfers risks and rewards but not control• Operating – does not transfer risks and rewards or control

Subsequent accounting is consistent with existing U.S. GAAP* Control principle aligned with new revenue standard

* Leveraged lease treatment no longer available for new leases

SE ACCOUNTING STANDARD

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Identifying a Lease

Lease: A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an

identified asset) for a period of time in exchange for consideration

Determine at inception based upon: Whether contract fulfillment depends on use of an identified asset* Whether contract conveys right to control use of an identified asset and

obtain substantially all of the economic benefits for consideration for a time period

* Consider whether supplier has substantive right of substitution

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Definition of a Lease

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INITIALMEASUREMENT

Right-of-use asset

Present value (PV) of lease payments + lessee’s initial direct costs

Initial direct costs: Incremental costs directly attributable to negotiating and arranging a lease

Recognize lease incentives as a reduction in the right-of-use asset

Lease liability (LL)

PV of lease payments

Private company practical expedient - use risk-free rate to measure LL

SUBSEQUENTMEASUREMENT

Right-of-use asset

Amortized cost: Method of amortization depends on lease classification (finance or operating)

Impairment: Refer to existing standards (ASC 360)

Lease liability

Amortized cost: Use the effective interest method

Private company practical expedient - use risk-free rate to measure LL

Lessee Accounting

LEASE ACCOUNTING STANDARD

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Lease Term and Payments

Lease Term Estimated as the non-cancellable period

of the lease

Include periods under option to extend IF lessee is reasonably certain to exercise option

Include periods under option to terminate IF lessee is reasonably certain NOT to exercise option

Same analysis for purchase options

Lease Payments (Rentals) Fixed lease payments (less incentives to

be paid by lessor)

Variable payments tied to an index

Variable payments which are in-substance fixed payments

Residual value guarantees (probable amount)

Exercise price of purchase option IF lessee is reasonably certain to exercise option

Termination penalties IF lease term reflects lessee exercising option

Fees paid to structure an SPE

Two elements form basis for PV of lease payments:

LASE ACCOUNTING STANDARD

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Lease Payments

Variable payments:

• Day 1 - include index-based payments (e.g., CPI escalator) measurement based on the rate at commencement.

• Day 2 - only reassess when the lease liability is reassessed for other reasons (e.g., contract modification). Otherwise, changes in the index are period expenses.

• Guidance issued in July 2018 (ASU 2018-10) clarifies that a change to an index or rate on which some or all of the variable lease payments in a contract are based does not constitute the resolution of a contingency. As a result, a lessee does not re-measure the lease payments when there is solely a change to an index or rate on which variable lease payments are based.

In-substance fixed payments are included in Day 1 lease liability, consistent with current practice.

Discount rate - use the rate implicit in the lease if determinable, otherwise use incremental borrowing rate.

• Under guidance in ASC 2018-10 the rate cannot be less than zero

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Lessee Accounting

Balance SheetAll leases:

Present separately* or within similar classes of assets and liabilities with proper disclosure

*No co-mingling of finance and operating leases

Income Statement Finance: Display interest on lease

liability and amortization of ROU asset consistently with other interest and amortization expenses (combine or separate)

Operating: Display interest on lease liability together with amortization of ROU asset, within income from continuing operations

Presentation for LESSEES:

EASE ACCOUNTING STANDARD

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Lessee Accounting

Statement of Cash Flows Operating activities

• Interest on lease liability arising from finance leases*

• Payments arising from operating leases

• Variable lease payments and S/T lease payments not included in lease liability

Financing activities• Principal repayments on finance leases

*the requirement is to present consistent with Topic 230, which generally will result in operating classification

Presentation for LESSEES:

LEASE ACCOUNTING STANDARD

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2019 Final ASUs Issued

ASU 2019- Title BDO Alert

01 Leases (Topic 842): Codification Improvements 2019-01 Alert

02Entertainment—Films—Other Assets—Film Costs (Subtopic 926-20) and Entertainment—Broadcasters—Intangibles—Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for Program Materials

N/A

03 Not-for-Profit Entities (Topic 958): Updating the Definition of Collections N/A

04 Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments 2019-04 Alert

05 Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief 2019-05 Alert

06Intangibles—Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958): Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities

2019-06 Alert

08Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements—Share-Based Consideration Payable to a Customer

Coming Soon

Current as of November 13, 2019

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Clarifies certain aspects of new leases guidance• Allows non-manufacturer/dealer lessors to use cost, reflecting any volume or trade discounts, as

the fair value of the underlying asset

• Lessors that are depository/lending institutions will present all principal payments received under leases as investing cash flows. Other lessors will present all cash receipts from leases as operating cash flows.

• Provides an exception to the paragraph 250-10-50-3 interim disclosure requirements in the ASC 842 transition disclosure requirements (applies to lessees and lessors).

ASU 2019-01, Leases (Topic 842): Codification Improvements

Effective Dates Public Business Entities Other Entities

FYs beginning after 12/15/2019 FYs beginning after 12/15/2020

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Aligns accounting for production costs of an episodic television series with accounting for production costs of films by removing the content distinction for capitalization

Provides guidance on reassessing estimates of the use of a film, assessing impairments, and relevant presentation and disclosures.

ASU 2019-02, Improvements to Accounting for Costs of Films and License Agreements for Program Materials

Effective Dates Public Business Entities Other Entities

FYs beginning after 12/15/2019 FYs beginning after 12/15/2020

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Updates the definition of “collections” to align with commonly used code of ethics terminology:

Works of art, historical treasures, or similar assets that meet all of the following criteria:a. They are held for public exhibition, education, or research in furtherance of public service rather

than financial gain.

b. They are protected, kept unencumbered, cared for, and preserved.

c. They are subject to an organizational policy that requires the use of proceeds from items that are sold to be for the acquisitions of new collection items, the direct care of existing collections, or both.

Applies to all entities, including business entities, that maintain collections, but primarily affects not-for-profit entities such as museums, historic sites, art galleries, etc.

Certain incremental disclosures required.

ASU 2019-03, Updating the Definition of Collections

Effective Dates Public Business Entities Other Entities

FYs beginning after 12/15/2019 FYs beginning after 12/15/2019

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Narrow improvements and clarifications to scope, recognition, measurement, presentation, and disclosure guidance issued in the following recent ASUs:

See summary – next slide

ASU 2019-04, Financial Instruments Codification Improvements

•Effective for FYs beginning after 12/15/19, including interim periods within those fiscal years

ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10):

Recognition and Measurement of Financial Assets and Financial

Liabilities

•Effective concurrent with ASU 2016-13 (or FYs beginning after 12/15/19 if already adopted 2016-13)

ASU 2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments

•Effective concurrent with ASU 2017-12 (or beginning of first annual period after issuance of 2019-04 if already adopted 2017-12)

ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities

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Topic Issues addressedFinancial Instruments(ASU 2016-01)

HTM debt security FV disclosures; applying ASC 820 to the FV measurement alternative; and remeasuring equity securities at historical f/x rates.

CECL(ASU 2016-13)

Accrued interest; transfers between classifications or categories of loans and securities; asset recoveries; reinsurance recoverables; projecting variable interest rates; effect of prepayments on effective interest rate; costs to sell when foreclosure is probable; vintage disclosures for LOC arrangements converted to term loans; and contract renewals.

Hedging(ASU 2017-12)

Partial-term FV hedges of interest rate risk; amortization and disclosure of FV hedge basis adjustments; consideration of hedged contractually specified interest rate in the hypothetical derivative method; scope of NFP entities; hedge documentation for private companies; first-payments-received cash flow hedging technique; and transition.

ASU 2019-04, Financial Instruments Codification Improvements

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Provides alternative to irrevocably elect the fair value option for eligible financial assets measured at amortized cost upon adoption of ASU 2016-13 (credit losses standard)

For an instrument to be eligible:• Asset must be within the scope of the new credit losses standard, and • Asset must be eligible for applying the fair value option in ASC 825-10

Apply on instrument-by-instrument basis Not available for available-for-sale or held-to-maturity debt securities Effective concurrent with ASU 2016-13, or FYs beginning after 12/15/19 if

already adopted 2016-13

ASU 2019-05, Credit Losses: Targeted Transition Relief

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Allows NFPs to elect private company accounting alternatives:

Goodwill (ASC 350)

• Option to amortize goodwill on a straight line basis over a period of 10 years (or less if appropriate)

• If elected, entity must test goodwill when a triggering even occurs at either the entity level or reporting level.

Certain identifiable intangible assets in a bizcom (ASC 805)

• Option to subsume the following into goodwill:

- Customer-related intangible assets that are incapable of being sold or licensed independently from other assets acquired, and

- All non-complete agreements

• If elected, must also elect ASC 350 goodwill alternative

Effective immediately with same open-ended one-time election available to private companies

ASU 2019-06, Extending Private Company Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities

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Effective Dates Public Business Entities Other Entities

FYs beginning after 12/15/2019 FYs beginning after 12/15/20191

1 And interim periods beginning after 12/15/2020, unless entity adopted ASU 2018-07, in which case it would be for interim periods beginning after 12/15/2019.

ASU 2018-07 on Improvements to Nonemployee Share-Based Payment Accounting require that share-based payment awards granted to a customer in conjunction with selling goods or services be accounted for under ASC 606

Lack of guidance on measuring share-based payment awards granted to a customer could result in diversity, because entities may apply: • ASC 606 noncash consideration guidance (measure at contract inception), or• ASC 718 guidance (measure at grant date)

ASU 2019-08 requires measurement and classification of share-based payment awards granted to a customer by applying ASC 718

ASU 2019-08, Codification Improvements—Share-Based Consideration Payable to a Customer

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2019 Select Proposals

Title Comment Deadline

Invitation to Comment, Identifiable Intangible Assets and Subsequent Accounting for Goodwill

October 7, 2019BDO comment letter

Proposed ASU, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

October 7, 2019BDO comment letter

Proposed ASU, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity

October 14, 2019BDO comment letter

Proposed ASU, Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent)

October 28, 2019BDO comment letter

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Solicits feedback on: Whether to change the subsequent accounting for goodwill

• Explores possibilities of amortizing goodwill, modifying the impairment test, costs and benefits of recent simplifications to goodwill model

Whether to modify the recognition of intangible assets in a business combination • Explores whether to subsume all or some intangible assets into goodwill,

principles-based approach, or status quo Whether to add or change disclosures about goodwill and intangible assets Comparability and scope Other topics for consideration

Invitation to Comment, Identifiable Intangible Assets and Subsequent Accounting for Goodwill

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Reduce the number of models in ASC

470-20 (convertible instruments)

Revise the guidance in ASC 815-40

(derivatives scope exception)

Update diluted EPS models (ASC 260)

Expand related disclosures

Overview of Proposed ASU – Convertible Instruments and Contracts in an Entity’s Own Equity

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Convertible Instruments* - Existing GAAP Proposed GAAPEmbedded derivative model (ASC 815-15) to account for convertible debt instruments with embedded conversion features that are not clearly and closely related to the host contract, meet the definition of a derivative, and do not meet the criteria for the derivatives scope exception. Conversion features are bifurcated as derivatives from the host contract and measured at fair value.

Model retained

Cash conversion model (ASC 470-20) to account for convertible debt instruments that may be settled entirely or partially in cash upon conversion. Host contract is measured at the fair value of a similar debt without conversion features, and conversion features are recorded as equity components at the residual amount.

Model eliminated

Beneficial conversion feature model (ASC 470-20) to account for convertible debt instruments with conversion features that are in the money at the commitment date or that become in the money at a later date after the occurrence of a contingent event. Conversion features are recorded as equity components at intrinsic value, and the host contract is recorded at the residual amount.

Model eliminated

Substantial premium model (ASC 470-20) to account for convertible debt instruments issued at substantial premiums. Conversion features are recorded as equity components.

Model eliminated

Traditional convertible debt model (ASC 470-20) to account for other convertible debt instruments as a single debt instrument measured at amortized cost.

Model retained

Proposed ASU – Convertible Instruments and Contracts in an Entity’s Own Equity

* Proposed amendments have a similar effect on convertible debt and convertible preferred stock guidance

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Revise the guidance in ASC 815-40 (derivatives scope exception), as follows: Layer a likelihood threshold to existing indexation guidance

• Evaluating any potential adjustments that have a remote likelihood of occurring no longer would be required

• Will create new requirement for companies and auditors to analyze and document whether a triggering event is probable, involving time, effort, and judgment.

Remove the following from the settlement guidance:• Requirement to evaluate provisions that could require net cash settlement

but have a remote likelihood or occurring • Condition regarding settlement in unregistered shares• Condition regarding collateral• Condition regarding shareholder rights

Proposed ASU – Convertible Instruments and Contracts in an Entity’s Own Equity

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Update EPS guidance to align with amendments to convertible debt and derivatives scope exception, as follows: Require the if-converted method for convertible instruments (versus treasury

stock method); should not change practice in most cases Require share settlement presumption for calculating diluted EPS when an

instrument may be settled in cash or shares (i.e., remove current guidance allowing a rebuttable presumption)

Include equity-classified convertible preferred stock that includes a down round feature in the scope of the recognition and measurement guidance for down-rounds in EPS guidance.

Require average market price to calculate diluted EPS denominator when the exercise price or number of shares to be issued varies based on share price.

Proposed ASU – Convertible Instruments and Contracts in an Entity’s Own Equity

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Expand convertible debt (instrument) disclosures to compensate for reduction in accounting models: Add disclosure objective Add information about events or conditions that occur during the reporting

period that significantly affect the conversion conditions Add information on which party controls the conversion rights Align disclosure requirements for contingently convertible instruments with

other convertible instruments Require that existing fair value disclosures in ASC 825, Financial Instruments, be

provided at the individual instrument level rather than in the aggregate

Proposed ASU – Convertible Instruments and Contracts in an Entity’s Own Equity

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Proposes a principles-based model for determining classification: An entity would classify an instrument as noncurrent if either of the following

criteria is met as of the balance sheet date: 1. Liability is contractually due to be settled more than one year (or operating

cycle, if longer) after B/S date2. Entity has a contractual right to defer settlement of the liability for a period

greater than one year (or operating cycle, if longer) after B/S date Continue to classify debt as noncurrent (separate from other noncurrent) if

waiver received for covenant violation Additional disclosures proposed Would apply to all debt arrangements, including convertible debt instruments,

liability-classified mandatorily redeemable financial instruments, and lease liabilities

Proposed ASU, Simplifying the Classification of Debt (Current versus Noncurrent)

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Reference rate reforms under way may affect accounting for existing contracts referring to LIBOR Regulators have undertaken reference

rate reform initiatives

Significant volume of contracts will need to be modified such as debt agreements, lease agreements, derivative instruments

Challenges likely to arise in accounting for:

1. Contract modifications (e.g., debt modification, lease modification accounting)

2. Hedge accounting.

Proposal would provide optional expedients and exceptions in applying US GAAP to contracts affected by reference rate reform if certain criteria are met. Applies only to contracts referring to

LIBOR, or other rate expected to be discontinued due to reference rate reform

Changes must be related to replacement of reference rate

Would not apply to contract modifications entered after December 31, 2022

Proposed ASU, Reference Rate Reform

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PCC and EITF Update

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The PCC met on April 1-2 to discuss the following: An update on plans for the next PCC Town Hall meeting

Implementation—leases

Implementation—revenue recognition

Distinguishing liabilities from equity (including convertible debt)

Disclosures by business entities about government assistance

Financial performance reporting—disaggregation of performance information

Simplifying the balance sheet classification of debt

Disclosure framework: disclosure review—income taxes

Disclosure improvements in response to the SEC’s release on disclosure update and simplification

PCC Issue No. 2018-01, “Practical Expedient to Measure Grant Date Fair Value of Equity-Classified Share-Based Awards”

Other PCC issuesAccess the meeting recap

Private Company Council (PCC) APRIL 2019 MEETING

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The PCC met on June 25 to discuss the following: Share-based payments: expedient to measure FV

Leases: implementation readiness

Pending ITC: goodwill and intangibles

Effective dates for private companies

Reference rate reform

CECL implementation

Income tax simplification

EITF revenue recognition issue

Access the meeting recap

Private Company Council (PCC) JUNE 2019 MEETING

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The PCC met on September 11 to discuss the following: Practical expedient to measure grant-date fair value of equity-classified share-based

awards

Implementation of ASU 2016-02, Leases (Topic 842)

Identifiable intangible assets and subsequent accounting for goodwill

Simplifying the balance sheet classification of debt

Distinguishing liabilities from equity (including convertible debt)

Reference rate reform: facilitation of the effects of the interbank offered rate transition on financial reporting

Effective date philosophy

Access the meeting recapNext meeting: December 16-17, 2019

Private Company Council (PCC) SEPTEMBER 2019 MEETING

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Issue 18-A: Recognition under Topic 805 for an Assumed Liability in a Revenue ContractStatus: Completed (subsumed on 7/31/19 into research project on Recognition and Measurement of Revenue Contracts with Customers under Topic 805) Discussed comment letters on proposed ASU and invitation to comment Recommended the FASB add a project on measuring assumed contract liabilities in a

revenue contract acquired in a business combination Postponed decision on recognition until measurement & related issues are addressed

Issue 19-A: Financial Instruments—Clarifying the Interactions between Topic 321 and Topic 323Status: Final Consensus Under the ASC 321 measurement alternative, consider observable transactions requiring

application or discontinuation of equity method Apply ASC 321 instead of ASC 323 to certain forward contracts and purchased options on

equity securities that are not derivatives and not deemed in-substance common stock

Emerging Issues Task Force (EITF)

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Issue 19-B: Revenue Recognition—Contract Modifications of Licenses of Intellectual PropertyStatus: Initial Deliberations Task force members discussed the issues; no tentative decisions reached Issues:

• Accounting for contract modifications in which another right is added to the existingrights, and situations in which licensing rights are revoked, including options toconvethe contract term is extended (i.e., whether to apply ASC 606 guidance onlicense renewals or guidance on modifications)

• Accounting for rt from software license to hosted (service) arrangement

Issue 19-C: Warrant Modifications: Issuers’ Accounting for Modifications of Equity ClassifiedFreestanding Call Options That Are Not within the Scope of Topic 718 or Topic 815Status: Added to EITF agenda on September 18, 2019. No deliberations yet.

Next meeting: tentatively March 12, 2020

Emerging Issues Task Force (EITF)

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SEC Matters Update

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SEC Update and Reporting Reminders - Agenda

2019 SEC Activities and Rulemaking

•Revenue Recognition (Topic 606)•Non-GAAP Measures•Management Discussion and Analysis (“MD&A”)•Other

Comment Letter Topics

• Internal Control over Financial Reporting•SAB 74 Disclosures – Current and Expected Credit Losses •Reference Rate Reform – LIBOR Transition Disclosures•Contractual Obligations Table Reporting•Form 10-K Process Reminders

SEC Reporting Reminders

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2019 SEC ACTIVITIES AND RULEMAKING

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Commission Developments• New Commissioner

- Allison Lee (D) - July

• Robert Jackson Jr. (term expired in 2019)

Staff Developments• Chief Accountant, Wes Bricker, departs

• Sagar Teotia (former Deputy Chief Accountant in OCA) named Chief Accountant

People Developments

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SEC Rulemaking – Focus Areas

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Capital Formation

Disclosure Effectiveness

Investor Protection

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SEC FINAL RULEMAKING

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Streamline and simplify disclosure requirements, discourage repetition and disclosure of immaterial information

Include changes to:

• MD&A• Confidential treatment requests• Cross-referencing• Property Disclosures• Risk Factors• XBRL and hyperlinks

Refer to BDO SEC Alert

SEC Rulemaking – FAST Act Modernization & Simplification of Regulation S-K (Final Rules)

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Amendments to MD&A:• Omit reference to year-to-year comparisons and allow registrants to use any

presentation that enhances an investors understanding of the registrant’s financialcondition and results

• Option to generally omit MD&A discussion of the earliest of the three years presentedin the financial statements if the discussion is included in any of prior filings

• Disclose location in prior filing where discussion can be found

Ability to omit confidential information from exhibits without first asking the staff for confidential treatment

Effective Dates:- Confidential treatment requests – April 2, 2019

- Use of XBRL tags on the cover pages of certain filings - phased in over a three years

- All other amendments – May 2, 2019

SEC Rulemaking – FAST Act Modernization & Simplification of Regulation S-K (Final Rules)

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Extends the “test-the-waters” accommodation currently only available to emerging growth companies to ALL issuers

Enables issuers to gauge market interest in possible offering with certain institutional investors prior to, or following, the filing of a registration statement

Final Rule is effective December 3, 2019

Refer to Press Release for more information

SEC Rulemaking – Solicitations of Interest Prior to a Registered Public Offering (Final Rules)

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SEC PROPOSED RULEMAKING

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Proposal would change the definitions of an accelerated and large accelerated filer to exclude issuers that otherwise qualify as a smaller reporting company and have annual revenues of less than $100 million in their most recently completed fiscal year.

SEC Rulemaking – Proposed Amendments to Accelerated and Large Accelerated Filer Definitions

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These proposed changes would reduce the number of issuers

that qualify as accelerated filers and

are intended to reduce compliance costs for smaller

reporting companies

If adopted, certain low-revenue issuers

would not be subject to SOX 404(b) auditor

attestation requirements regarding ICFR

These low-revenue issuers would not need

to comply with the shorter SEC reporting

deadlines that apply to accelerated and large

accelerated filers

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Maintain the existing initial qualification thresholds for accelerated and large accelerated filer status based on public float

Add a conforming revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status

Increase the public float transition thresholds for exiting accelerated and large accelerated filer status to 80% of the initial qualification thresholds

Refer to BDO SEC Alert

SEC Rulemaking – Proposed Amendments to Accelerated and Large Accelerated Filer Definitions

66

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Proposed significant changes to: The calculations for measuring the significance of acquired and disposed

businesses under S-X Rule 1-02(w) The financial statement requirements for a significant acquired business under

S-X Rule 3-05 The financial statement requirements for a significant acquired real estate

operation under S-X Rule 3-14 Article 11, Pro Forma Financial Information

Investment company acquisitions

Refer to BDO SEC Alert

SEC Rulemaking – Proposed Amendments to Financial Disclosures About Acquired and Disposed Businesses

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Proposed amendments to S-X Rule 1-02(w): Investment test – compare investment to aggregate worldwide market

capitalization Income test – add a revenue component to the test and require the use of after-

tax income from continuing operation

Proposed amendments to S-X Rule 3-05: Reduce maximum period of audited annual financial statements to two years Eliminate the requirement to present acquired business financial statements in

registration and proxy statements in certain circumstances Permit registrants to use abbreviated financial statements to satisfy S-X Rule 3-

05 requirements when certain criteria are met Permit the use of financial statements prepared under IFRS as issued by the

IASB in certain circumstances

SEC Rulemaking – Proposed Amendments to Financial Disclosures About Acquired and Disposed Businesses

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Proposed amendments to Article 11 would permit additional pro forma adjustments which are prohibited under today’s rules Two categories of pro forma adjustments under the proposal:

• “Transaction adjustments” (to reflect the accounting for the transaction) • “Management adjustments” to reflect certain synergies and other

transaction effects of the acquired business)

SEC Rulemaking – Proposed Amendments to Financial Disclosures About Acquired and Disposed Businesses

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Proposed changes to the Description of Business, Legal Proceedings, and Risk Factor disclosure requirements

Description of Business• Emphasize a principles-based approach to disclosure• Provide a non-exclusive list of types of information that may need to be

disclosed• Permit registrants to provide an update of general development of business

that focuses on material developments in the reporting period with a hyperlink to previous filing where full discussion can be found

SEC Rulemaking – Proposed Amendments to Regulation S-K Items 101, 103, and 105

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Legal Proceedings• May be provided using hyperlinks or cross-references to legal proceedings

disclosure included elsewhere in the filing to avoid duplication Risk Factors

• Require a summary risk factor disclosure if the section exceeds 15 pages• Change the disclosure standard from the “most significant” factors to the

“material” factors required to be disclosed• Require risk factors to be organized under relevant headings

Refer to BDO SEC Alert

SEC Rulemaking – Proposed Amendments to Regulation S-K Items 101, 103, and 105

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Add new subpart 1400 of Regulation S-K and replace Guide 3 Codify certain Guide 3 disclosures and eliminate overlapping or redundant

disclosures Require some new disclosures

Refer to BDO SEC Alert

SEC Rulemaking – Proposed Amendments to UpdateDisclosure Requirements for Banking Registrants

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COMMENT LETTER TOPICS

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Comment Letter Topics HIGH FOCUS AREAS

74

Revenue Recognition (“Topic 606”)

Non-GAAP Financial Measures

MD&A

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Comment letters seek clarity on Topic 606 accounting and disclosures, including: The identification of performance obligations The type and nature of variable consideration, including whether any variable

consideration is constrained Information regarding the method used to recognize revenue for performance

obligations and why the method is appropriate The analysis for presenting revenue on a gross vs. net basis (i.e., principal vs.

agent considerations) Disaggregation of revenue that reflect how economic factors affect the nature,

amount, timing and uncertainty of revenue and cash flows

Revenue Recognition (“Topic 606”)

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Revenue Recognition (example)

With respect to your ABC and XYZ licensing agreements, please address the following: Identify for us the promised goods and/or services under the agreement. Tell us how you determined which promised goods and services were material

and distinct, and thus performance obligations, as well as which promises may have been combined.

Quantify for us the total transaction price, how it was determined as well as the items (i.e. milestones, royalties, etc.) included/excluded and the reasons therefore, the amounts allocated to the various performance obligations, and the amounts recognized during the year ended December 31, 2018 and the three months ended March 31, 2019.

Provide us a breakout of the regulatory milestones you may be eligible to receive by type and amount.

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Revenue Recognition (example)

Your disclosure on page F-26 related to your ABC Innovation Platform indicates that license revenue is recorded at a point-in-time given your determination that delivery of the intellectual property to the licensee is a distinct performance obligation. You also disclose that you record the associated milestone payment portions of transaction prices as revenue at a point-in-time. Please address the following as it specifically relates to your License and Development Agreement with XYZ, Inc.:

Identify for us the promised goods and/or services under the agreement;

Explain to us how you considered the development services you are required to perform in determining that the license was a distinct performance obligation;

Quantify for us the total transaction price, how you determined it, and the amounts allocated to the various performance obligations;

Tell us the method (ASC 606-10-32-8) you use to estimate variable consideration for reaching development and regulatory milestone events and the nature, amount and trigger for each constrained milestone; and

Provide us your accounting analysis supporting your accounting policy of recognizing milestones at a point-in-time.

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Comments focus on measures that appear to: • Modify GAAP recognition and measurement principles (i.e., constitute an

individually tailored accounting principle)• Exclude normal cash operating expenses from performance measures• Be applied inconsistently period to period (i.e., changing measures over

time) Expense associated with the reduction of the right-of-use asset for operating

leases over time is a component of rent expense and should not be reflected as “amortization” in EBITDA or Adjusted EBITDA performance measures.

Non-GAAP Financial Measures

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The staff frequently commented on MD&A disclosures. The nature of these comments:• Increasing specificity in describing “why” changes have occurred period over

period.• Seeking more information about the underlying causes and effects of known

trends, events, and uncertainties.• Focusing the discussion of critical accounting estimates on the significant

judgements and estimates that, if changed or varied, will significant impact their results.

• Providing more detail about performance indicators, financial or nonfinancial that are used to manage the business.

MD&A

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Other perennial favorites• Fair value measurements• Intangible assets and goodwill • Income taxes• Segment reporting

Other Comment Letter Topics

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SEC REPORTING REMINDERS

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Takeaways from recent SEC enforcement actions against companies with long-outstanding material weaknesses in internal control over financial reporting • Disclosure of material weaknesses isn’t enough without meaningful

remediation• Refer to press release for more information

Internal Control over Financial Reporting

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ASU 2016-13 Financial Instruments – Credit Losses (Topic 326) will be effective for SEC filers excluding Smaller Reporting Companies for periods beginning after December 15, 2019 (December 15, 2022 for all other entities). • Final ASU deferring effective dates for certain companies pending as of

November 12 Standard will require companies to measure all expected credit losses for

financial assets (including trade receivables) based on historical experience, current conditions and reasonable supportable forecasts about collectability.

SAB 74 disclosures are to provide investors with information about the impact that recently issued accounting standard will have on the financial statements.

SAB 74 Disclosures - Current and Expected Credit Losses (CECL)

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The London Interbank Offered Rate (LIBOR) is expected to be replaced by an alternative rate after 2021.

The staff encourages registrants to disclose (in MD&A):• Status of Company’s efforts and significant matters to be addressed related

to the expected discontinuation of LIBOR.• When the Company does not yet know or cannot yet reasonably estimate the

impact.• Information used by management and the board in assessing and monitoring

how transitioning from LIBOR may affect the Company.

Reference Rate Reform – LIBOR Transition Disclosures

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Disclosure of the future maturities of operating lease obligations is required in the financial statement footnotes.

ASC Topic 842 defines what should be included in the future minimum lease payments disclosure. For example, Topic 842 requires lessees to include renewal options that are reasonably certain of being exercised. This is a change from Topic 840 which did not provide such guidance.

The payment obligations included in the contractual obligations table in MD&A should be consistent with the future minimum lease payments schedule.

Contractual Obligations Table Reporting

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Completion of the financial reporting process requires careful attention to detail. Processes should ensure that:• The EDGARized version of the 10-K is complete and accurate (i.e., no

missing paragraphs or columns from tables, no truncation of information in tables, etc.)

• All relevant dates appear within the audit reports, consents, and signatures • The form and content of registrants’ annual certifications are accurate• All material contracts are included within the exhibits to the filing• New cover page regarding market/trading symbol and delinquent section 16

reports• New Item 601(b)(4)(vi) requires an exhibit with Item 202 information

(description of securities)

Form 10-K Process Reminders

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PCAOB Update

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Project Current Stage TimingAuditing Accounting Estimates, Including Fair Value Measurements, and Amendments to PCAOB Auditing Standards

Final Standard issued on 12/20/2018 – approved by SEC on 7/1/2019

Effective for audits of fiscal years ending on or after December 15, 2020.

Amendments to Auditing Standards for Auditor’s Use of the Work of Specialists

Final Standard issued on 12/20/2018 – approved by SEC on 7/1/2019

Effective for audits of fiscal years ending on or after December 15, 2020.

PCAOB Recently Completed Standard-Setting

Refer to: https://pcaobus.org/Standards/Pages/recently-completed-standard-setting-activities.aspx

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Project Current StageQuality Control Standards, Including Assignment and Documentation of Firm Supervisory Responsibilities

Developing a concept release for public comment for the Board’s consideration in Q4 2019.

Supervision of Audits Involving Other Auditors

Analyzing comments to determine next steps.

Going Concern Monitoring effect on audits of the changes to the relevant accounting standards. Reminder: AS 2415, Consideration of an Entity's Ability to Continue as a Going Concern, and Staff Audit Practice Alert No. 13 continue to provide the applicable requirements and guidance.

PCAOB Current Projects – Standard Setting

Refer to: https://pcaobus.org/Standards/research-standard-setting-projects/Pages/default.aspx

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PROJECT STATUS

Changes in the Use of Data and Technology in the Conduct of Audits

Researching whether impediments exist in PCAOB audit standards.

Auditor’s Role Regarding Other Information and Company Performance Measures, Including Non-GAAP Measures

Summarizing research findings and developing recommendations for next steps.

Auditor’s Consideration of Noncompliance with Laws and Regulations

Summarizing research findings and developing recommendations for next steps.

PCAOB Research Agenda

Refer to: https://pcaobus.org/Standards/research-standard-setting-projects/Pages/default.aspx

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Featured Videos on CAMs

CAM often relate to matters identified as significant risks; however, there is not a 1:1 relationship.

Since CAM are defined as matters that involve especially challenging, subjective, or complex auditor judgment, not every significant risk identified by an engagement team would necessarily meet that definition and accordingly would not result in a CAM communication. Conversely, matters other than significant risks may also rise to the level of a CAM. One such example may be a nonrecurring transaction.

Number of identified CAM vary and are unique to the nature of each audit. Since CAM are unique to a particular audit and are based on the facts and circumstances of each audit, there may be CAM even in an audit of a company with limited operations or activities.

PCAOB Resources: https://pcaobus.org/Standards/Implementation-PCAOB-Standards-rules/Pages/new-auditors-report.aspx#resources

Critical Audit Matters

In May 2019, Erin Dwyer joined the PCAOB as a direct point of contact for liaison to investors, audit committees, and preparers. Erin shares some additional information about her role and these CAMs-related resources in this short video.

Megan Zietsman, the PCAOB’s Chief Auditor, describes some of the latest resources available on CAMs ahead of the effective dates.

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Of the large accelerated filer survey respondents that participated in dry runs: 62% reported 3–6 meetings with their auditors 76% indicated that the process lasted 0–6 months 43% of ACs identified additional controls that required implementation, while an additional

19% are still considering such changes

Intelligize Survey Findings:CAM Lessons Learned from Dry Runs

For additional information see the Intelligize report, Critical Audit Matters: Public Company Adaptation to Enhanced Auditor Reporting

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Intelligize Survey Findings

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Average of 1.8 CAMs per company No reports where no CAMs were

identified Includes:

• First 44 LAF reports filed• 10 of the S&P 500• 1 Foreign Private Issuer

Observations from June 30, 2019 Large Accelerated Filers

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Observations from June 30, 2019 Large Accelerated Filers

96

Corporate Governance: Audit Committee Tools and Resources

97

Click here for Top 5 Takeaways publication

2019 BDO Board Survey

98

https://www.thecaq.org/archive-audit-committee-

transparency-barometer/

Key findings from 2019 Audit Committee Barometer:

The CAQ concludes that year over year finding trends indicate that while progress is encouraging, AC can do more to increase transparency and, as a result, investor confidence in voluntarily providing robust disclosures to inform investors.

CAQ 2019 Audit Committee Barometer

Positive Trends Concerns

Increases in discussion of • non-audit services and

independence

Many disclosure levels are stagnant or slowing for all size companies

• auditor tenure Low disclosure continues around:

• Criteria for evaluating the auditor

• Significant areas addressed w/ auditor

• Involvement in audit partner selection

• Auditor compensation

• Cybersecurity • Audit fees and audit quality

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This edition of Profession in Focus features Christopher Tower, National Assurance Managing Partner for Audit Quality and Professional Practice at BDO USA LLP. Tower provides an overview of the many ways that BDO communicates the firm’s strong commitment to audit quality, both externally and internally. He also provides insights into how BDO developed its 2019 Audit Quality Report, including its use of the CAQ’s Audit Quality Disclosure Framework to help inform the report’s structure and content.

CAQ Profession in Focus: Communicating the Commitment to Audit Quality

100

Delivering Sustained Audit Quality

Source: BDO 2019 Audit Quality Report

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April 2019 – The Center for Audit Quality (CAQ) issued an updated tool with sample questions for ACs to consider in assessing the external auditor on a “1-5 satisfaction” scale: Quality of services & sufficiency of resources provided

within the audit engagement team Quality of services & sufficiency of resources provided by

the audit firm Communication & interaction with the external auditor Auditor independence, objectivity, & professional

skepticismLearn more by reading BDO’s flash report

CAQ Updated External Auditor Assessment Tool

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In addition to educating stakeholders on ICFR, this publication includes the

addition of significant research demonstrating the importance

and impact of ICFR and integrated audits on the quality

of financial reporting.

Access BDO’s Alert here.

After the SEC recently fined a number of companies for failing to remedy material weaknesses in ICFR, the PCAOB released a Staff Preview of its 2018 Inspection Observations, highlighting the testing of ICFR remains a common audit deficiency.

ICFR remains an important component to fostering confidence in a company’s financial reporting, and ultimately, trust in our capital markets. To assist in these concerns, the Center for Audit Quality (CAQ) has updated and re-released its popular Guide to Internal Control over Financial Reporting as an overview to assist stakeholders in understanding key ICFR concepts, roles and responsibilities, and what ICFR means for companies, investors, and the markets.

CAQ Guide: Internal Control over Financial Reporting

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Learn more by reading BDO’s release discussing the CAQ’s publication

The CAQ has released Emerging Technologies, Risk and the Auditor’s Focus: A Resource for Auditors, Audit Committees, and Managementto highlight the financial reporting implications of the evolving use of technology together with the benefits, risks, and associated auditor considerations. Building on the previously released 2018 CAQ Emerging Technologies: An Oversight for Audit Committees, the CAQ provides insight to key stakeholders in the following areas:

CAQ: Digital Transformation & Audit

EMERGING TECHNOLOGIES –RISK ASSESSMENT

AND THE AUDIT

TECHNOLOGY IMPACT –

POTENTIAL AREAS OF AUDITOR FOCUS

KEY TECHNOLOGY DEVELOPMENTS –THE BASICS AND

AUDITOR IMPLICATIONS

104

Resources

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The roles and responsibilities of the

Audit Committee continue to evolve adding to the

continuing need to stay on top of accounting and audit regulations and

mandatory and voluntary disclosures.

BDO continues to compile tools and resources to

assist Audit Committees in fulfilling their obligations

and documenting their activities, designed so

that members may focus on the risks at hand.

Stay tuned for more tools being released this summer and fall!

BDO Audit Committee Resources

Recommended Resources Intended Use

BDO Audit Committee Self Assessment

Tool to assist in evaluating how the Audit Committee is executing governance responsibilities.

BDO Audit Committee Requirements Practice Aid

Tool to assist Audit Committees in fulfilling their oversight responsibilities and documenting their activities.

BDO Audit Committee Illustrative Charter

Tool with example to assist Audit Committees in constructing their own company-specific charter to be used as a working document or practical roadmap of responsibilities and duties.

BDO Professional Judgment Framework

Tool to assist professionals in their capacity to logically assess situations or circumstances and to draw sound, objective conclusions that are not influenced by cognitive traps and biases or by emotion.

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A resource center with the continual education needs of those charged with governance andfinancial reporting in mind!

The BDO Center for Corporate Governance and Financial Reporting

AN INCREDIBLE RESOURCE AT YOUR FINGERTIPSThe BDO Center for Corporate Governance and Financial Reporting was born from the need to have a comprehensive, online, and easy-to-use resource for topics relevant to boards of directors and financial executives. We encourage you to visit the Center often for up-to-date information and insights you can rely on.

What you will find includes:

Thought leadership, practice aids, tools, and newsletters

Technical updates and insights on emerging business issues

Three-pronged evolving curriculum consisting of upcoming webinars and archived self-study content

Opportunities to engage with BDO thought leaders

External governance community resources

For more information about BDO’s Center for Corporate Governance and Financial Reporting,please go to: www.bdo.com/resource-centers/governance

To begin receiving email notifications regarding BDO publications and event invitations (live and web-based), visit www.bdo.com/member/registration and create a user profile.

If you already have an account on BDO’s website, visit the My Profile page to login and manage your account preferences www.bdo.com/member/my-profile.

A dynamic and searchable on-line resource for board of directors and financial executives

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Title DateWhat’s on the Minds of Boards: BDO 2019 Board Survey (Part 2) Feb 2020What’s on the Minds of Boards: BDO 2019 Board Survey (Part 1) Jan 2020Quarterly Technical Update – Q4 2019 Jan 20202019 Board Pay and Governance Outlook for Mid-Cap Companies - Are You Prepared? (coming soon) Dec 2019

2019 CEO/CFO Pay Outlook for Mid-Cap Companies - Are You Prepared? (coming soon)Dec 2019

Transforming Internal Audit Methodology Into Agile IA Nov 2019

BDO Board GovernanceUPCOMING WEBINARS

For a complete listing of BDO webinars and archived webinars, refer here.

108

Title DateDemystifying Critical Audit Matter (CAM) Reporting Oct 2019Quarterly Technical Update – Q3 2019 Oct 2019How Audit Committees Manage Difficult Moments Sep 2019Top IT Audit Risks Sep 2019Quarterly Technical Update – Q2 2019 July 2019Audit Speed – Opportunities for Enhancement Jun 2019Building Tomorrow’s Business: What Does Digital Transformation Mean for Middle-Market Companies in 2019 Jun 2019

California Consumer Privacy Act: 6 Mont Countdown for Retailers Jun 2019Power Growth: Complexities of Accounting in a Global World May 2019Getting to the Point – Effective Audit Ratings Apr 2019Corporate Governance – Spotlight on Evolving Diversity on the Board Apr 20192019 Shareholder Meetings – What’s On Deck? Part 1 Apr 20192019 Shareholder Meetings – What’s On Deck? Part 2 Apr 2019Quarterly Technical Update – Q1 2019 Apr 2019Innovative Use of Robotics in Internal Audit Feb 2019BDO’s 2019 IPO Outlook Survey and Key Takeaways from a Successful IPO Feb 2019

BDO Board GovernanceARCHIVED WEBINARS

For a complete listing of BDO webinars and archived webinars, refer here.

109

Title DateQuarterly Technical Update – Q4 2018 Jan 20192018 Executive and Board Pay Outlook for Mid-Cap Companies – Are Your Prepared? Dec 2018Adding Value Via Internal Audit Transformation: Finding the Right Balance Nov 2018What’s on the Minds of Boards – BDO 2018 Cyber Governance Survey Nov 2018What’s on the Minds of Boards - BDO 2018 Board Survey Nov 2018New SOC 2 Guidance and What It Means for Your Company Nov 2018The New GILTI Proposed Regulations: What Have We Learned Nov 2018Quarterly Technical Update – Q3 2018 Oct 2018Cybersecurity: Protecting Your Organizations from Today’s Everchanging Threats Oct 2018GDPR: What U.S. Boards of Directors Need to Know Sep 2018Cybersecurity - Resources Boards Want to Know About Sep 2018How To Deal With the Impacts of Wayfair Aug 2018Quarterly Technical Update – Q2 2018 July 2018

BDO Board GovernanceARCHIVED WEBINARS

For a complete listing of BDO webinars and archived webinars, refer here.

110

Title DateImpact of Tax Reform on Corporate Strategic M&A Transactions Jun 2018From Scandals to Serious Setbacks: How a Poor Company Culture Can Impact… Jun 2018Impact of U.S. Income Changes on Cross Board Mobility May 2018The New Leasing Standard – Are Your Ready? May 20182018 Shareholder Meetings – What’s on Deck? Apr 2018Quarterly Technical Update – Q1 2018 Apr 2018Compensation Committee: Tax Reform Impacts & Other Trends… Feb 2018Understanding the New Hedging Standard Feb 2018Tax Reform and the Board’s Role Jan 2018

BDO Board GovernanceARCHIVED WEBINARS

For a complete listing of BDO webinars and archived webinars, refer here.

111

Title DateInternal Audit’s Role in Monitoring and Controlling International Exposure Nov 2017Building an Effective Compensation Committee Oct 2017Harnessing the Power of Data and Data Analytics and Continuous Monitoring Sep 2017Applying the New Revenue Standard (Part 2) Aug 2017Applying the New Revenue Standard (Part 1) Aug 2017ASC 606, Revenue from Contracts with Customers Aug 2017Internal Audit’s Role in Highly Acquisitive Organizations Jun 2017AICPA SOC for Cybersecurity - What You Need to Know Now Jun 2017Director Diversity – Striking the Right Balance in the Boardroom Jun 2017Board Leadership – How to Onboard Your Board May 2017Reducing the Burden of Sox Compliance Apr 2017What Boards Need to Know About Cybersecurity (But May Be Afraid to Ask) Mar 2017

BDO Board GovernanceARCHIVED WEBINARS

For a complete listing of BDO webinars and archived webinars, refer here.

112

Title DateBoards as Catalysts for Intrapreneurship and Innovation Feb 2017Small Cap Boards – Realities and Strategies for Capital Structuring Jan 2017Board Collaboration: Leveraging Communication Tools and Technology Oct 2016Navigating the Rising Tide of Cybersecurity Regulation – How Is Your Board Preparing? July 2016M&A Execution: Planning with Post-Integration in Mind May 2016How Is Your Board Positioned to Respond to Illegal Acts? May 2016When and Why Should a Board Require an Independent Fairness Opinion May 2016Executive Performance Goals Which Do Not Create Enterprise Risk Apr 2016

BDO Board GovernanceARCHIVED WEBINARS

For a complete listing of BDO webinars and archived webinars, refer here.

113

BDO Board GovernancePUBLICATIONS

For a complete listing of BDO publications, refer to: https://www.bdo.com/insights/

Title Date3 Reasons Why You Need to Forge Ahead with Lease Accounting Implementation Nov 20192019 SEC Reporting Insights Nov 2019BDO Knows Lease Accounting Nov 2019BDO Knows Lease Accounting: Road to Compliance Checklist Nov 2019BDO Comment Letter – Simplifying the Classification of Debt in a Classified Balance Sheet Nov 2019

The BDO 600 – 2019 Study of Board Compensation Practices Oct 20192019 Board Survey Oct 2019Tax Reform Impact Continues Oct 2019FASB Affirms Decisions to Defer Effective Dates of Major New Accounting Standards Oct 2019BDO Comment Letter – Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity Oct 2019

BDO Comment Letter – Identifiable Intangible Assets and Subsequent Accounting for Goodwill Oct 2019

BDO Comment Letter – Reference Rate Reform (Topic 848) (File Reference No. 2019-770) Oct 2019

114

BDO Board GovernancePUBLICATIONS

For a complete listing of BDO publications, refer to: https://www.bdo.com/insights/

Title Date2019 Board Survey – Top 5 Takeaways Sep 2019SEC Proposes to Update Disclosures Requirements for Banking Registrants Sep 20192019 Tax Planning Timeline Sep 2019CECL for Non-Financial Institutions Sep 20192020 Cybersecurty Guidelines for C-Suite Executives Sep 2019BDO Comment Letter – Financial Instruments—Credit Losses (Topic 326) Sep 2019BDO Comment Letter – Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 Aug 2019

Delivering Sustained Audit Quality Aug 2019FASB Proposes to Defer Effective Dates of Major New Accounting Standards Aug 2019SEC Proposes More Changes to Modernize Regulation S-K Disclosure Aug 2019

115

BDO Board GovernancePUBLICATIONS

For a complete listing of BDO publications, refer to: https://www.bdo.com/insights/

Title DateBDO Comment Letter – Codification Improvements to Topic 326, Financial Instruments – Credit Losses July 2019

The Future of Auditor Reporting is Here July 2019BDO Cyber Threat Insights - 2019 2nd Quarter Report July 2019Significant Accounting & Reporting Matters Q2 2019 July 2019PCAOB Issues CAM Resources For Non-Auditors July 2019Illustrative Audit Committee Charter July 2019CAQ Issues External Auditor Assessment Tool: A Reference For U.S. Audit Committees July 2019PCAOB Preview of 2018 Inspection Observations July 2019CAQ Issues External Auditor Assessment Tool: A Reference for U.S. Audit Committees July 2019Illustrated Audit Committee Charter July 2019

116

BDO Board GovernancePUBLICATIONS

For a complete listing of BDO publications, refer to: https://www.bdo.com/insights/

Title DateBDO Comment Letter - Disclosure Improvements Jun 2019CAQ Issues Emerging Technologies, Risk, and the Auditor's Focus Jun 2019ASC 842 Implementation for Private Companies: Lessons Learned from Public Companies Jun 2019

Six Month Countdown to CCPA: The 10 Information Governance Steps Needed for Compliance Jun 2019

FASB Simplifies Accounting for Goodwill & Certain Identifiable Intangible Assets for NFPs Jun 2019

Benefits of Independent Analysis of Lease Portfolios Jun 2019CAQ Issues a Tool For Audit Committees: Preparing for the New Credit Losses Standard Jun 2019Understanding ICFR Jun 2019Three Ways to Reduce Income Tax Reporting Risk Jun 2019FASB Issues Transition Relief for Credit Losses Standard Jun 2019Understanding Complex Financial Instruments Jun 2019Understanding Internal Control over Financial Reporting Jun 2019BDO Professional Judgment Framework Jun 2019

117

BDO Board GovernancePUBLICATIONS

For a complete listing of BDO publications, refer to: https://www.bdo.com/insights/

Title DateBDO Comment Letter - Disclosure Framework Changes to the Disclosure Requirements for Income Taxes May 2019

Audit Committee Self Assessment May 2019GDPR One Year Later: A Data Privacy Retrospective May 2019FASB Issues Targeted Improvements to Financial Instruments Standards May 2019BDO Knows California Consumer Privacy Act May 2019SEC Proposes Amendments to Disclosures About Acquired and Disposed Businesses May 2019SEC Proposes Amendments to Accelerated and Large Accelerated Filer Definitions May 2019FASB Targets Improvements to Financial Instruments Standards May 2019

118

BDO Board GovernancePUBLICATIONS

For a complete listing of BDO publications, refer to: https://www.bdo.com/insights/

Title DateBDO Knows California Consumer Privacy Act May 2019SEC Proposes Amendments to Disclosures About Acquired and Disposed Businesses May 2019SEC Proposes Amendments to Accelerated and Large Accelerated Filer Definitions May 2019FASB Targets Improvements to Financial Instruments Standards May 2019BDO Comment Letter – Revenue from Contracts with Customers Apr 2019Data Ethics Part 1: California and Beyond Apr 2019Tax Transformation: Value Drivers of Change Apr 2019Additional CAM Resources for Audit Committees Mar 2019BDO 2019 Shareholder Meeting Agenda Mar 2019PCAOB 2019 Inspections Outlook for Audit Committees Mar 2019FASB Issues Improvement to Leases Standard for Lessor Financial Institutions Mar 2019ERISA Roundup – Q1 2019 Mar 2019

119

BDO Board GovernancePUBLICATIONS

For a complete listing of BDO publications, refer to: https://www.bdo.com/insights/

Title DateMuch Ado About Tariffs: Preparing for March 1 and Beyond Feb 2019BDO Comment Letter: Extending Private Company Accounting Alternative on GW and Certain Intangible Assets Feb 2019

For a Smoother Landing into the New Leases Standard Feb 20192019 BDO IPO Outlook Feb 2019Significant Accounting & Reporting Matters – Q4 2018 Feb 2019Tax Transformation Guide Feb 2019De-Mystifying Cyber Threat Intelligence Feb 2019Getting ‘On Board’ with Gender Diversity Jan 2019Eight Key Tax Planning Opportunities for 2019 Jan 20192018 Audit Committee Round Up Jan 20192018 Accounting Year in Review Jan 2019

120

BDO Board GovernancePUBLICATIONS

For a complete listing of BDO publications, refer to: https://www.bdo.com/insights/

Title DateBDO’s Integrated Thinking and Reporting Journey Guide Jan 2019FASB Issues Narrow-Scope Improvements of Lessors Jan 2019Cryptocurrency: The Top Things You Need to Know Jan 20192019: The Year of Legal Digital Transformation Jan 2019SEC 2018 Year in Review Jan 2019Embracing Digital Transformation Jan 2019BDO’s 2019 Middle Market Digital Transformation Survey Jan 2019CECL Update Jan 2019SEC Examination Priorities for 2019 Jan 2019Auditor Communications: CAQ Issues Audit Quality Disclosure Framework Jan 2019BDO Cyber Threat Insights – 2018 Q4 Report Jan 2019SEC Releases Request for Comment on Quarterly Reporting Jan 2019CAQ CAM Implementation Tool: Early Lessons Being Learned Jan 2019

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Questions?

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Domestic and InternationalTax Update

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With You Today

STEVE CULLIMORETransfer Pricing Principal

(206) 403-2460scullimore@bdo.com

JERRY BREGGTax Office Managing Partner

(619) 253-9835jbregg@bdo.com

CHIP MORGANInternational Tax Partner

(310) 557-7517cmorgan@bdo.com

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Today’s Discussion Topics

Three Stages of Tax Reform Domestic Tax International Tax

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The Three Stages of Tax Reform

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Anticipating Tax Reform

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Digesting Tax Reform

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Reflections on Tax Reform

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Domestic Tax Landscape

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Reduced Tax Rates

ReflectionsThe rate cut was a cornerstone provision of the TCJA but was coupled with various, less favorable provisions which offset some of that benefit including impacting many unsuspecting taxpayers:

• Interest Deduction Limitations

• Repeal of DPAD

• GILTI

• BEAT

• Modified Ownership Attribution Rules

35%

21%

Tax Law ChangeCorporate tax rate was reduced from 35% to 21% effective January 1, 2018.

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State Income Tax Conformity = Windfall

ReflectionsSignificant added complexity in complying with the varied conformity around the new federal provisions.

For those states which conformed, in most cases, the new provisions had an unfavorable impact on the income base without a corresponding reduction to their own tax rates creating windfalls for state governments.

Tax Law ChangeMany of the state jurisdictions conformed their rules to the federal rules while others decoupled.

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State Income Tax Conformity (cont’d)

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Net Operating Loss Carryovers

Reflections

Scheduling of deferred tax assets has become noticeably more complex.

The ability of an organization to “smooth out” its income over time has some significant limitations now and will require companies to be more cautious in planning out taxable income/loss from one year to the next.

Secondary tax incentives such as tax credits will now be of greater utility to companies with NOL carryovers.

Some taxpayers should consider opting out of bonus depreciation or other capitalization provisions.

Impact of Code Sec. 382 has changed given the indefinite carryforward period.

Tax Law Change

Tax loss carryovers are limited to 80% of taxable income for losses arising in tax years beginning after December 31, 2017.

The carryback provisions have been repealed for tax years ending after December 31, 2017.

Carryforward period is indefinite for NOL’s generated in post-2017 tax years.

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Limitation on Deduction for Interest

Tax Law ChangeInterest deduction is limited to 30% of a business’ adjusted taxable income

Adjusted taxable income is computed without regard to deductions for business interest expense or business interest income, net operating losses, 20% deduction for certain pass throughs and, in the case of tax years beginning before January 1, 2022, depreciation, amortization, and depletion.

Complicated rules relating to partnership interests included.

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Limitation on Deduction for Interest

ReflectionsSignificant lost deduction for many companies,in particular, private equity owned portfolio companies.

While initially recorded as a deferred tax benefit due to indefinite carryforward period, for many this will become a “permanently” lost deduction absent significantly improved operating performance.

Beginning in tax year 2022 and beyond, the lost deduction will affect a large number of additional taxpayers and further limit the benefit for those already impacted.

Complex interaction with foreign subsidiaries –potential opportunity to increase the US parent’s 30% ceiling.

Tax Law Change

Provisions do not apply to a taxpayer that has annual gross receipts less than $25M for the three taxable years prior to the reporting year.

Unused interest can be carried forward indefinitely.

Effective for tax years beginning afterDecember 31, 2017.

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Under Simplification

Reflections

The plain language of the TCJA provisions alone created a significant amount of additional complexity coupled with the need to interpret many hastily written provisions created an environment of uncertainty and confusion for many taxpayers.

The sheer volume of compliance increased dramatically for most taxpayers, most notably with respect to:

Computing and reporting around foreign subsidiary activity including GILTI, FDII, foreign tax credits and foreign earnings and profits

State conformity analysis Sec. 199A analysis Interest deduction limitations Transportation fringe benefits

Tax Law Change

Most of the TCJA provisions, in particular, international provisions

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Bright Spots

ReflectionsSignificant benefit to small business owners and investors as was not tied to material participation.

Ability to expense capital expenditures but flexibility to opt-out if it better serves your tax circumstances.

Should promote greater ease of cash repatriation.

Tax Law Change199A Deduction

100% Bonus Depreciation

Transition Tax and 100% Dividends Received Deduction

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Research and Experimental Expenditures

Reflections

Delayed applicability provision which has not received a lot of press time yet.

Will impact virtually every business in some way, at a minimum, needing to demonstrate they do not have any Sec. 174 expenses which might be subject to capitalization.

Most taxpayers have not historically done much around this because they were eligible to deduct these costs immediately so there was no reason to differentiate.

“Includes all such costs incident to the development or improvement of a product”.

Tax Law Change

Sec. 174 research and experimental expenditures will be required to be capitalized including software development costs for tax years beginning after December 31, 2021.

5-year amortization if activity is conducted in the U.S.; 15-year amortization for activity conducted outside the U.S.

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International Tax

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International Tax

International Tax Landscape

International Considerations for Provisions

Global Taxation Trends

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International Tax Landscape

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Transfer Pricing Puzzle

Digital Economy

Value Drivers

BEPS 2.0 Information Exchange

Substance“DEMPE”

CbCReporting

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Section 965 Transition “Toll” Tax

Tax Law Change Required the Dec 31, 2017 inclusion by

shareholders of specified foreign corporations of their pro-rata share of “deferred foreign income” (“DFI”)

DFI was defined as earnings accumulated back to 1986

DFI was taxed at a 15.5% rate to the extent it was attributable to the foreign corporation’s aggregate cash position and at an 8% rate otherwise

An election was available to pay the tax over an 8 year period interest-free

Deferral for S Corps

Reflections Not Old and Cold

Certain Triggering Events can accelerate payments that would have otherwise been deferred interest-free over 8 years

Complex rules for different categories of Previously Taxed Income that can be repatriated free of federal tax (but consider foreign withholding tax and state income tax)

Expect this to be an area of focus in due diligence exercises

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Global Intangible Low-Tax Income (GILTI)

Tax Law Change New IRC Sec. 951A taxes GILTI in a manner similar to

Subpart F, i.e., whether or not the income is distributed

GILTI = Net tested income over its “net deemed tangible income return”

“Consolidate” the Controlled Foreign Subsidiaries (CFCs) to determine tested income and tested loss

Net deemed tangible income return equals 10% of the excess of the profitable CFCs’ depreciable tangible assets

IRC Sec. 250 allows corporate taxpayers a deduction of 50% of GILTI (reduced to 37.5% for years after 2025) and a Foreign Tax Credit (FTC) equal to 80% of foreign taxes incurred.

GILTI has its own separate FTC basket and there is no carryover of any excess FTC – use it or lose it.

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Global Intangible Low-Tax Income (GILTI)

Reflections Arguably the provision within the TCJA with the biggest

impact on multinational taxpayers – in effect a global minimum tax of 10.5% for corporations.

Much worse for individuals and flow-through entities – no 50% deduction and no FTC (absent partial relief via an election to be taxed as a corporation).

Requires calculation of each CFC’s income or loss as if it were a US corporation; pre-TCJA, Earnings & Profits (E&P) were often not tracked in practice until determined to be meaningful.

For taxpayers with US interest expense, GILTI can trigger a cash liability to the IRS even if the foreign tax incurred exceeds 13.125%.

For taxpayers with US NOLs, GILTI both accelerates utilization of the NOL (no 50% deduction) and prevents potential future use of excess FTCs.

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Foreign Derived Intangible Income (FDII)

Tax Law Change Provides corporations a reduced rate of

tax on qualifying income: 13.125% though 2025, then 16.4%

FDII is income earned from export transactions, broadly defined: includes services and intangibles, not just product sales, and includes related parties, not just third parties

Similar to GILTI, it applies to the excess of qualifying revenue less allocable expenses, over 10% of tangible property used in production of the income.

Limited to profitable corporations – FDII cannot reduce taxable income below zero.

Reflections Determining qualified export transactions –

especially for complex supply chains where components cross borders to result in a final product.

Favorable development: ability to claim FDII benefit on branch transactions, such as sales to foreign subsidiary for which a check-the-box election has been made to treat the subsidiary as a disregarded entity for US tax purposes.

Allocation of expenses is based on facts and circumstances (getting granular can be beneficial), but there are special rules regarding interest, R&D and depreciation expenses.

Shelf life query: is FDII an illegal export subsidy?

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Unexpected CFCs: Repeal of Sec 958(b)(4)

Foreign Parent

Fgn Sub

Pre-Tax Reform

US Sub

Foreign Parent

Fgn SubUS Sub

Others US

Post-Tax Reform(Actually Jan 1, 2017)

Not a CFC CFC

90% 10%

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Customs Triangle

Customs Compliance

I. Classification

II. Valuation III. Country of Origin

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Tariff Classification

Imported Goods must be classified under the Harmonized Tariff Schedule of the United States ("HTSUS") – based on global Harmonized System (“HS”).

HTSUS classification determines duty rates, eligibility for Free Trade Agreements, import quotas, etc.

Determining the correct tariff code is a highly technical analysis reliant on a thorough understanding of a significant number of laws, regulations, and rulings.

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Goods imported into the U.S. must be properly valued at the time of import in order for CBP to assess the proper amount of import duties.

Most duties are assessed ad valorem, so a lower value means lower duties.

The “dutiable value” is a calculation usually based on the “price actually paid or payable” (Transaction Value or “TV”) for the goods when sold for export to the United States.

Customs Valuation

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Intersection with Transfer Pricing

TRANSFER PRICING CUSTOMS VALUATION

Determination of item affectingtaxable income

Determination of price of goods imported

Income determined when tax return filed Prices determined at date of entry

Annual information return requiredPrice reported to authority with each entry of imported goods

Tax on income in the aggregate Duty at goods classification level

Taxpayer-initiated adjustments allowed to ensure proper reflection of income

Retrospective adjustments disallowed in certain jurisdictions and typically required to be broken down on a goods-specific basis

“Best method analysis – whatever works!If customs value rejected, strict hierarchy of alternative methods

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COO is typically the last country of manufacture – NOT country of export or country where vendor is located.

Must be shown on the commercial invoice.

Normally determined by “substantial transformation” rule: the finished good in the last country of assembly/processing must have a different name, character, or use than the starting materials.

Country of origin must be marked clearly and in English on the article or its container/package; if packaged individually, each item must be marked.

Country of Origin (“COO”)

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Transfer Pricing Developments to Watch

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Ninth Circuit’s decision on stock-based compensation

• Mandated inclusion in cost base

Country-by-country reporting

• Multi-lateral Instrument for exchange of information

• India joins list of 62 countries

LIBOR-based loans

• Prepare now before LIBOR goes away in 2022

Functional Cost Diagnostic Model

• New tool for IRS to understand a taxpayer’s business

Pervasive Transparency

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International Tax Considerations for Provisions

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Continuing Regulations Post-Tax Reform

On August 9, 2019, the IRS posted proposed regulations regarding the classification of cloud transactions and transactions involving computer programs, including transfers of digital content, as a provision of services or a lease of property

• These regulations address cloud transactions and provide a non-exhaustive list for when they are treated as a lease or service, but do not provide any guidance on how to determine the source of income generated by such transactions

On December 2, 2019, the IRS posted Temporary and Final Regulations on foreign tax credits and on the base erosion tax rules

• FTC: These rules include final guidance on how to claim FTCs against GILTI and proposed rules offering relief on to companies with R&D expenses in the US

• BEAT: These rules include final guidance on the calculation of the BEAT tax and proposed rules on how to apply BEAT to partnerships or if certain deductions are waived

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APB 23

In light of the changes resulting from tax reform (transition tax, GILTI, dividends received deduction, revised FTC regime), it is critical for companies to track the outside basis differences of their investments in foreign subsidiaries, regardless of whether they are asserting indefinite reinvestment

Companies need to track various outside basis differences for each foreign subsidiary, including foreign withholding, US federal, and state

The US federal and state outside basis differences may also include foreign currency gains/(losses) on previously taxed income (PTI) or other currency translation that could be taxable

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ASU 2016-16 Deferred Tax Accounting

Multinationals with significant IP, such as pharmaceutical and technology companies, should reveal the tax effects of intra-entity transfers of those properties between jurisdictions in the period they occur

Companies must recognize the current and deferred income tax consequences of intra-entity asset transfers, other than inventory, when the transfer occurs

IP and property, plant, and equipment are two common examples included in the scope of ASU 2016-26

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SaaS providers could potentially face significant liabilities on VAT overseas

Tax authorities around the world have introduced/are introducing rules to apply VAT on electronically supplied services

Suppliers of software via license or ongoing subscription can be caught by these rules

If not managed correctly this tax could come out of a provider’s income

Providers need to consider the impact of tax on pricing and profitability

Often an area of review for due diligence

VAT on Software as a Service (“SaaS”)

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Electronically supplied servicesThe list continues to grow each year

Non-EU Countries that also have or plan to introduce place of consumption rules to electronically supplied services.

Switzerland India Israel Malaysia

Norway Russia Uruguay Canada (Quebec only)

Iceland Serbia Argentina Singapore

South Africa Taiwan Thailand Chile

South Korea Australia Brazil Costa Rica

Japan Belarus Philippines Saudi Arabia

New Zealand Turkey Colombia United Arab Emirates

Bangladesh Vietnam Indonesia Uzbekistan

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Taxing Global Companies: Going Beyond The Digital Debate?Overview of OCED’s work on Digital Taxation

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Overview

The OECD is leading multilateral efforts to address tax challenges from digitalization of the world economy as part of its BEPS 2.0 process

The OECD’s tax proposal is designed to address:

1. Allocation of taxing rights, including nexus issues, among countries (Pillar 1) and

2. Counter profit shifting and avoidance by multinational companies (Pillar 2)

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OECD BEPS Project

A desire to eliminate non-taxation of income in an international supply chain

The Perceived Issue

Current Tax Framework: Taxes by the location of management of key functions, assets and risks

Modern business: Scale without mass through reliance on technology

OUTCOME?

Reallocation of taxable income

Complex web, and risk of double tax?

The work in progress

Limited global consensus – but a desire to work together to agree a modern tax framework

Most territories prefer a multilateral solution backed by the OECD

However, global agreement is proceeding too slow for some and unilateral measures are spreading…

Digital Tax Discussion

A perceived need to re-analyse where profits of international businesses should be taxed in the modern highly digitised business environment

The Political Landscape

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BEPS 1 – 5 October 2015

Indirect change (125 countries)Direct tax, wait and see…

OECD Report – 16 March 2018

Status and principles, not solutions

EU Digital Tax Package –21 March 2018

Moving to legislationInterim, and long termDST ultimately abandoned…

Updated OECD Policy Note – 29 January 2019

‘Grouping’ and outline proposals

Pillar 1 Consultation = Oct 9; Pillar Consultation = November 9

The Timeline So Far – Key Events

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Pillar 1

Broad challenges of the digital economy

Focus on allocation of taxing rights

Three proposals presented

Pillar 2

Addressing remaining BEPS issues

An effective global minimum tax – a European GILTI?

The OECD Paper

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PILLAR 1 – OECD Work Programme

Profit allocation rules

Methods for determining in scope profit and loss

Simplification for taxpayer and tax authority

Assessment of administrability

Methods

Modified Residual Profit Split

Fractional apportionment

Distribution-based approaches

Segmentation / scope

Business line and regional segmentation

Design scope limitations

Treatment of losses

Nexus

Extend PE definition

New standalone provision

Indicators of remote and sustained economic involvement

Implementation

Elimination of double tax

Dispute resolution

Administration, Including treaty modification

New profit allocation rules

New nexus rules

Implementation of the new taxing right

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PILLAR 1 – Proposal 1: User Value Creation

Overview Revise existing rules on nexus and profit allocation by reference

to ‘active user contribution’

Would apply to highly digitised businesses only

Would recognise the value created by users of highly digitised services.

Profit attribution Profits allocated to the jurisdiction where active and

participatory user bases are located, irrespective of physical presence.

Challenges Attempts to “ring-fence” the digital economy – is it doomed to

ultimately fail?

Differing views on whether, and the extent to which, users create value.

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PILLAR 1 – Proposal 2: Marketing Intangibles

Overview Revise existing rules on nexus and profit allocation by reference

to ‘marketing intangibles’

Applies broadly to all types of business

Would recognise the value created by the market jurisdiction.

Profit attribution Attribute all (or a portion) of the non-routine or residual profit

which is attributable to marketing intangibles to the market.

Challenges Very broadly applicable

Potentially complex?

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PILLAR 1 – Proposal 3: SEP

Overview Derives from BEPS Action 1 Report

Defines nexus based on significant economic presence, e.g. through quantity of sales

Aims for simplified, easy to administer solutions.

Profit attribution Significant economic presence would arise where there is a

purposeful and sustained interaction with the country through digital technology.

Challenges Already tried this with CCCTB in the EU?

How to deal with intangibles.

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The high-level takeaways on the Pillar 1 proposal are:

Multinational enterprises will pay heavier share of their profits, as the tax will be imposed on where their digital users are, regardless of company’s physical presence. Digital presence replaces physical presence to create tax nexus.

Taxation is delivered via three-tiered model similar to US state tax formulary apportionment. Each tier is designed to capture a percentage of the primary total or residual profits, which is based on standalone financial positions, as well as consolidated financial statements.

The unified approach will establish tax to be paid to each country, with pro rata calculation of profits. It will also create dispute resolution mechanisms.

Additional Comments

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PILLAR 2 – Minimum Taxation Principle

Income inclusion rule:

Include profits as income in the hands of a related party investor

Tax on base eroding payments:

Would allow the source country to deny a deduction, or impose

withholding tax, on ‘undertaxed’ payments PART 2 PART 1

PART 3

Coordination Rule:

To mitigate risk of double taxation

Seeks to address the ongoing risk of profit shifting due to disparities in tax rates

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PILLAR 2 – OECD Work Programme

Anti-base erosion

Eliminate remaining BEPS challenges

Mitigate uncoordinated unilateral action

Ensure sovereign right to define policy

Rules

Income inclusion rule• Top-up• Fixed percentage

Tax on base eroding payments• Undertaxed payments• Subject to tax

Rule coordination

Overall coordination

Compatibility with international obligations

Thresholds / carve outs

BEPS Action 5 compliant regimes

Return on tangible assets

Related party transaction threshold

Implementation

Elimination of double tax

Dispute resolution

Administration, Including treaty modification

Income inclusion rule

Tax on base-eroding payments

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Unilateral Measures

India - 1 June 2016 (equalization Levy

Online advertising – 6% on revenue

1 April 2018 – SEP

40% on profits (but subject to treaty)

China – 1 December 2017

Enterprise Income tax

5-25% on profits (but subject to treaty)

France, Italy, Spain, UK – various stages

Close alignment to original EU DST proposals

Italy and Spain may be stalling? France and UK still pushing forward

Hungary – 15 September 2014

Advertising tax – 7.5% on revenue

Resident individuals and companies, non-resident companies (with or without a PE)

For some, the wait is too long…

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The Pillar 2 proposal attempts to implement a global minimum effective tax through four basic components: an income inclusion role, an undertaxed payments rule, a subject-to-tax rule, and a switchover rule

1. Income inclusion rule: This rule would apply to a foreign subsidiary or a branch if its income is taxed below a pre-determined minimal tax rate.

2. The undertaxed payments and subject-to-tax rules would deny deductions, deny treaty benefits, or impose a withholding tax in the case of payments to foreign-related parties.

3. The switchover rule would amend bilateral treaties to switch from an exemption method to a tax credit method for income tax at an insufficient effective tax rate.

Additional Comments

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The theoretical goal for Pillar 2 is similar to U.S. GILTI rules.

It introduces income inclusion rules, which will operate similarly to GILTI.

The undertaxed payments rule of Pillar 2 has similarities to the U.S. BEAT.

The proposal does not establish fundamental mechanism for the calculation such as:

• What will be the starting point of the inclusion calculation?

• How would income be derived if each country has different application of domestic tax calculations?

• How will different accounting principles be reconciled in the global inclusion?

• How will acquisitions and liquidations impact the income inclusion?

Comparison of Pillar 2 to U.S. GILTI

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Pillar 1 and Pillar 2 will create substantial complexity for global tax reporting.

For example, calculating a global minimum tax on either a jurisdictional basis or an entity-by-entity basis would be a very significant compliance effort. Parent country and home country jurisdictions would need to agree to a mechanism for reporting, for tracking, and for payments of potential top-up payments that would occur as a result of the minimum tax.

The deadline for finalizing these proposals is currently set in 2020.

Comparison of Pillar 2 to U.S. GILTI

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Questions?

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ASC 740 SIMPLIFICATION

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ASC 740 Simplification

At its April 10th Board meeting the FASB decided to add to its agenda a project regarding simplifications to accounting for income taxes

Project is part of the Board’s Simplification Initiative

The FASB had noted that accounting for income taxes has been among the top areas of restatement over the last several years (13-15 % of all restatements)

Based on feedback from accounting firms as well as suggestions from preparers and practitioners the Board identified certain requirements that had less relevance given tax reform as well as other requirements which were complex and prone to errors

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ASC 740 Simplification (cont’d)

The Board decided to remove the following exceptions in Topic 740, Income Taxes: Exception to the incremental approach for intraperiod tax allocation when there is a loss

from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income)

Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment

Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary (therefore, an entity would have the ability to assert indefinite reinvestment for the entire basis difference of a subsidiary)

Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

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ASC 740 Simplification (cont’d)

The board also decided the following: An entity should recognize a franchise tax that is partially based on income in accordance

with Topic 740 and account for any incremental amount as a non-income-based tax.

An entity should evaluate when a step up in the tax basis of goodwill should be considered part of the initial recognition of book goodwill and when it should be considered a separate transaction.

An entity should be permitted to forgo the allocation of consolidated current and deferred tax expense to legal entities that are not subject to tax in their separate financial statements.

An entity should reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.

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ASC 740 Simplification (cont’d)

The Board also decided to make Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.

The Board decided to exclude from the scope of the project an issue involving the accounting for nondeductible goodwill by private companies.

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ASC 740 Simplification (cont’d)

The Board affirmed its initial decisions at a meeting on September 4, 2019. In addition, the Board decided that an entity should apply the amendments as follows: Either retrospectively or modified retrospective for franchise taxes that are partially

based on income (changed from initial retrospective recommendation)

Retrospectively for the election to forgo the allocation of consolidated taxes to legal entities that are not subject to tax in their separate financial statements

Using a modified retrospective approach for ownership changes to a foreign equity method investment or subsidiary

Prospectively for all other amendments to Topic 740.

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DISCLOSURE FRAMEWORK

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Disclosure Framework

On, March 25th, the FASB issued a proposed Accounting Standard Update (ASU), Disclosure Framework-Changes to the Disclosure Requirements for Income Taxes: This proposed ASU is a revision to an exposure draft which was issued on July 26,2016

The amendments in the ASU will apply to all entities that are subject to income taxes

Certain of the disclosures would only be applicable to public business entities as that term is defined in the Master Glossary of the Codification

Comments were received on May 31,2019

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Disclosure Framework (cont’d)

As proposed all entities would need to disclose: Income (or loss) from continuing operations before income tax expense (or benefit) and

before intra-entity eliminations disaggregated between domestic and foreign

Income tax expense (or benefit) from continuing operations disaggregated between federal, state, and foreign

Income taxes paid disaggregated between federal, state, and foreign.

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Disclosure Framework (cont’d)

The following disclosures would be required for PBEs only: The line items in the statement of financial position in which the unrecognized tax

benefits are presented and the related amounts of such unrecognized tax benefits

The amount and explanation of the valuation allowance recognized and/or released during the reporting period –requires an explanation of what increases were and what decreases were and not merely a statement regarding that there was a net change-SEC Regulation S-X 210.12-09, Valuation and Qualifying Accounts requires registrants to provide a schedule ( basically a rollforward ) on valuation reserves if that information is not disclosed elsewhere in the financial statements. See subsequent slide for sample disclosure and rollforward.

The total amount of unrecognized tax benefits that offsets the deferred tax assets for carryforwards ( see subsequent slide for further discussion).

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Disclosure Framework (cont’d)

The proposed ASU would: Modify the existing rate reconciliation requirement for PBEs to be consistent with U.S.

Securities and Exchange Commission (SEC) Regulation S-X 210.4-08(h), Rules of General Application—General Notes to Financial Statements: Income Tax Expense.

That regulation requires separate disclosure for any reconciling item that amounts to more than 5 percent of the amount computed by multiplying the income before tax by the applicable statutory federal income tax rate.

The reconciliation may be presented in percentages or in reporting currency amounts.

The proposed amendments would further modify the requirement to explain the change in an amount or a percentage of a reconciling item from year to year (see subsequent slide for an example).

Do percentages make sense?—sensitive to variations in pre tax income

An entity other than a public business entity shall disclose the nature of significant reconciling items but may omit a numerical reconciliation.

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Disclosure Framework (cont’d)

The amendments in this proposed Update would reduce diversity in practice by explicitly requiring a PBE to disclose: The amounts of federal, state, and foreign carryforwards (tax effected before any

valuation allowance) by time period of expiration for each of the first five years after the reporting date, a total for any remaining years, and a total for carryforwards that do not expire.

The valuation allowance associated with the total tax-effected amounts of federal, state, and foreign carryforwards.

The total amount of unrecognized tax benefits that offsets the deferred tax asset attributable to carryforwards in accordance with paragraph 740-10-45-10A.

An entity other than a public business entity would be required to disclose the total amounts of federal, state, and foreign credit carryforwards and the total amounts of other federal, state, and foreign carryforwards (not tax effected), separately for those carryforwards that do not expire and those that do expire, along with their expiration dates (or a range of expiration dates).

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Disclosure Framework (cont’d)

The proposed amendments in the ASU would: Eliminate the requirement for all entities to (1) disclose the nature and estimate of the

range of the reasonably possible change in the unrecognized tax benefits balance in the next 12 months or (2) make a statement that an estimate of the range cannot be made

Remove the requirement to disclose the cumulative amount of each type of temporary difference when a deferred tax liability is not recognized because of the exceptions to comprehensive recognition of deferred taxes related to subsidiaries and corporate joint ventures.

Clarify that the disclosure of income taxes paid during the period under Topic 230, Statement of Cash Flows, is required for interim periods.

Clarify that income taxes on foreign earnings that are imposed by the jurisdiction of domicile shall be included in the amount for that jurisdiction of domicile ( currently there is diversity in practice—relates to withholding taxes).

Replace the term Public Entity with term Public Business Entity throughout the Topic 740 in accordance with ASU 2013-12, Definition of a Public Business Entity.

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Disclosure Framework (cont’d)

The amendments in this proposed Update would be applied prospectively. The effective date and whether early adoption of the proposed amendments should be permitted will be determined after the Board considers stakeholder feedback on the proposed amendments.

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SIGNIFICANT PRACTICE ISSUES

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Temporary Differences Acquired Other Than In A Business Combination ASU 2017-01 & ASC 740

ASU 2017 -01 Clarifying the Definition of a Business, Issued in January 2017

Under the new model fewer sets (integrated set of activities and assets) will result in business combination accounting

Possibility that more transactions will be accounted for using simultaneous equation method (Biotech/Pharma)

ASU 2017-01 is effective for public business entities for fiscal years beginning after December 15, 2017 (annual and interim periods). Other business effective for years beginning after December 15, 2018 and interim periods beginning after December 15, 2019

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ASU 2017-01 & ASC 740Example

Assume that an entity pays $1,000,000 for the stock of an entity in a nontaxable acquisition (that is, carryover basis for tax purposes). The acquired entity's sole asset is a Federal Communications Commission (FCC) license that has a tax basis of zero. Since the acquisition of the entity is in substance the acquisition of an FCC license, no goodwill is recognized. A deferred tax liability would need to be recorded for the temporary difference (in this example, the entire $1,000,000 plus the tax-on-tax effect from increasing the carrying amount of the FCC license acquired) related to the FCC license. The combined Federal and state tax rate is 25 percent.

ASC 740 requires that the amounts assigned to the FCC license and the related deferred tax liability should be determined using the simultaneous equation method as follows:

Tax Rate / (1 minus Tax Rate) * Initial temporary difference

195

ASU 2017-01 & ASC 740 (cont’d)Example

In January 2018, ABC Biotech Co. (“ABC” or “Company”) entered into a Stock Purchase Agreement and completed its acquisition of XYZ Biotech, Inc. (“XYZ”). After the acquisition, XYZ remains and operates as a wholly-owned subsidiary of ABC where it will file as part of ABC’s consolidated US tax return. The Company assessed the acquisition under ASU 2017-01 and determined that the assets acquired did not meet the definition of a business and that the transaction would be accounted for as an asset acquisition. ABC is a calendar-year public business entity.

The total purchase price was $3M and was allocated entirely to in-process research and development (IPR&D). The IPR&D assets acquired from XYZ are at an early stage of development and are considered to have no alternative future uses. As such, determining the future economic benefit of the acquired assets at the date of acquisition is highly uncertain. In accordance with ASC 730 (Research and Development), the IPR&D is charged to expense at the acquisition date. In addition, at the time of the acquisition and at the end of the year, ABC was in a full valuation allowance position.

What entry or entries are required as a result of this transaction? Assume a 21% tax rate.

196

ASU 2017-01 & ASC 740Example (cont’d)

Entry # 1 – Record initial purchase

DR: Intangible Asset 3,000,000

CR: Cash 3,000,000

Entry #2 – Record deferred tax liability on Book/Tax basis difference

DR: Intangible Asset 797,468

CR: Deferred tax liability 797,438

($3,000,000 * .21 / .79 = 797,468)

Entry #3 – Record VA release of ABC due to recording a DTL on the acquisition of XYZ (ASC 805-740-30-3)

DR: Valuation Allowance – ABC 797,468

CR: Deferred Tax Benefit – ABC 797,438

Entry #4 – Write-off IPR&D in accordance with ASC 730 – Research and Development

DR: IPR&D Expense 3,797,468

CR: Intangible Asset 3,797,438

DR: Deferred tax liability 797,468

CR: Deferred Tax Benefit – P&L 797,468

DR: Deferred Tax Expense – P&L 797,468

CR: Valuation Allowance 797,468

After reversal of the DTL, ABC and subsidiary still need to be in a full valuation allowance position. The overall tax impact to the P&L from these four entries is a benefit of $797K. Entry #4 has a net zero tax impact so Entry #3 is the only entry impacting consolidated tax expense.

197

ASU 2017-01 & ASC 740Example –Alternative View (cont’d)

An alternative application of the previous accounting which is published in one firm's guide and we have seen another firm take the position is to treat the immediate write off of the IPR&D as a permanent difference i.e. no tax effect. The theory behind the accounting is that the write off of the allocation of purchase price to IPR&D comes before the identification of deferred taxes because GAAP dose not allow the acquirer to recognize an asset. The approach is the same as that in EITF 96-7 except the EITF was issued with respect to the immediate write-off in a business combination.

198

ASU 2017-01 & ASC 740Key Take-aways

It is critical to understand how a company will be accounting for a transaction. The decision is not guided by tax

Complexities arise in situations such as:

• The acquisition of future tax benefits (e.g. NOLs) by acquiring the stock of an entity with minimal assets or activity

• The acquisition of financial assets as they are generally recorded at fair value. Potential deferred tax assets may result in the recognition of a deferred credit

IFRS does not follow this deferred tax accounting. Rather, IAS 12 has what is known as the “Initial Recognition Exemption” (IAS 12, para. 15(b))

199

Pass-Through Subsidiaries

Investments in partnerships can be accounted for under the consolidated, equity or cost method of accounting

Partnerships and other entities treated as partnerships (i.e. LLC’s/S-Corps) are not taxable entities. Rather, the tax consequences of transactions within the partnership flow through to the partners

• Exceptions include certain state taxes/NYC UBT and foreign taxes The partners then report their proportionate share of the partnership’s income or loss in their

individual capacities

Under ASC 740, a partner’s future tax consequences of recovering the financial basis of its investment in the partnership are recognized as deferred tax assets or liabilities

Errors and restatements are surfacing in this area due to companies not reconciling inside to outside basis ,carefully reviewing special allocations e.g. 704(c) and improper allocations per 704(b).

Partnership taxation is complex. Make sure that the partnership group is involved in the analysis.

200

Pass-Through Subsidiaries (Cont’d)

Deferred taxes are recognized on the outside basis difference of investments in pass-through subsidiaries – the difference between the financial statement carrying value and the tax basis of the investment in the partnership

• Will often be equal to the net basis differences in the assets and liabilities of the partnership (watch 704(c) allocations)

• Watch for exceptions related to goodwill and/or investments in foreign subsidiaries – discussed on the next two slides

The exceptions to recognizing deferred taxes in ASC 740 (both taxable and deductible) do not apply to the outside basis of the investment in pass-through subsidiaries

• Consideration is necessary for recoverability should there be a deductible temporary difference• There may be circumstances where a temporary difference only reverses upon a future sale or

liquidation. As a result, the exception under ASC 740-30-25-9 could be considered – Discuss with the audit firm involved as firms have different views on this

• Ordinary versus capital?• The exceptions in ASC 740-10-25-3 (general exceptions) and 740-30-25-9 (deductible outside basis

difference) generally will apply to a pass-through subsidiary’s investment in another entity

201

Pass-Through Subsidiaries (Cont’d)Example 1

Example of outside basis difference issues

What issues need to be addressed with respect to this structure from an initial formation perspective and on a continuing basis?

Facts:• X Corp & Y Corp contribute cash

of $6.5M and $3.5M respectively tothe venture

• X will consolidate the partnership for financial reporting purposes

• The partnership purchases assetsof an operating business for $10M

65%

X Corp

Y Corp

Partnership

35%

202

Unrealized Subpart F Income

Certain types of foreign income generate Subpart F income e.g. foreign base company sales, services and personal holding company income. Whether the income is realized or unrealized (will generate subpart F income ) deferred tax should be recorded due to a foreign temporary difference that will generate Subpart F income.

Examples of unrealized Subpart F income include but are not limited to: Gains on available for sale securities

Equity method investments

Cost method investments (could be remeasured in P&L)

Installment sale(if underlying sale will be FBCSI)

203

Example of Unrealized Subpart F Income

The 35% investment in Foreign Co 2 is accounted for under the equity method. The law in the country of Foreign Co 1 would exempt the gain on the sale of Foreign Co 2 from tax. Foreign Co.2 has been owned by Foreign Co 1 since 2016 and has always been profitable.

Foreign Co 1

Foreign Co 2

U.S.

35%

204

Issues:

1. FC2 would be eligible for 100% DRD since a specified foreign corporation (Code Sec 245A (also see Code Sec. 951(b)).

2. FC2 is not a CFC so Code Sec. 1248 would not be applicable.3. U.S. group would need to assess how in the future the outside basis difference would be

recovered at the date of the transition tax inclusion and based on future earnings. Could it assert that it would be recovered by dividend distributions subject to the 100% DRD? Generally, since FC1 does not control FC2 it would be difficult to argue that the basis would be recovered through dividend distributions and thus would need to provide on the outside basis difference (sale v. distribution analysis).

205

Example of Unrealized Subpart F Income

Pre Reorganization Post Reorganization

U.S. Co U.S. Co

Netherlands

China

Netherlands

Chineseacquirer

China

Analysis: Based on these facts U.S. Co. would recognize income tax expense of $1,365B and a related DTL. Due to the fact that since the Chinese acquirer is not a subsidiary that it Cannot be assert that the outside basis difference is “Permanent in duration” (ASC 740-30-25-18a).

Facts:• U.S. Co owns 100% of Netherlands

Co and 100% of Chinese Co.• Netherlands transfers 100% of its

interest in Chinese Co to Chinese acquirer solely in exchange for voting stock worth $7B

• For U.S. tax purposes treated as a B • reorganization• Tax free treatment for Dutch purposes• U.S. group recognizes a $6.5B gain for

financial statement purposes• Assume book and tax basis of

Netherlands in China is equal at the dateof sale

100%

100%

100%

15%

206

ASC 740 REFRESHER ON KEY ISSUES

207

Sec. 163(j) Limitation on Deduction for Interest

In practice could be one of the most if not the most complicated issue from an ASC 740 and tax return perspective

Proposed regulations were issued in December,2018 (over 450 pages of reading enjoyment), rules are complicated

Certain view for loss companies that will now become profitable due to 163(j) limit that a valuation allowance could be released with respect to NOLs based on the projected income in spite of the fact that the entity could be creating additional 163(j) limitation which will need to be reserved for

In addition, we have seen profitable companies that are leveraged now required to set up a VA on the 163(j) limited interest since unable to project utilization (requires extensive analysis and modeling)

30% limitation needs to be considered in ASC 740 analysis including relying solely on reversing taxable temporary differences (unlimited carryover period allows for offset versus a naked credit subject to the 30% limitation)

208

168(k) Bonus Expensing

Tax Law Change

The bill allows for 100% expensing for qualified assets placed in service after September 27, 2017 and before January 1, 2023.

Expensing amounts are phased down between Expands the definition of qualified property to include used property provided the taxpayer had not used the property and it is not acquired from a related party.

2023 through 2026.

Final regulations issued in September 2019.

Need to ensure there is a proper election out of bonus depreciation when appropriate

Can create issues with various limitations (e.g. Code Sec 250 deductions for GILTI & FDII)

ASC 740 Issues

Creates a larger temporary difference related to depreciation.

Larger taxable temporary differences could give rise to a future source of income which may impact the ability to realize deferred tax assets in the future.

Will states adopt or decouple – If decouple, will need a separate deferred for state depreciation.

State issues and separate state deferreds for depreciation

209

162(m) Excessive Employee Remuneration

Tax Law Change The Act eliminates the exceptions for

commissions and performance based compensation thus classifying all compensation greater than $1M as subject to limitation.

Expanded the definition of “covered employee” to include the CFO.

Covered employee now means the CEO, CFO, plus the three highest compensated officers for the year.

Adds a rule that once an employee is a “covered employee,” will always be a “covered employee”.

Provisions are effective for tax years beginning after December 31, 2017.

Awards that are subject to a written binding contract as of November 2, 2017 are grandfathered.

ASC 740 Issues Requires that any disallowed compensation due

to IRC Sec. 162(m) provisions not be recognized for financial statement purposes.

The revised 162(m) rules would now require that all compensation in excess of $1M be disallowed.

Companies should determine what method they are using for disallowed compensation for reporting purposes:

• Cash compensation first

• Equity compensation first

• Pro Rata Method

Be cognizant of modifications to written binding agreements as of November 2, 2017 which could make the award no longer exempt from disallowance.

210

162(m) Excessive Employee Remuneration(cont’d)

Issues encountered include: Monitoring grants to recently hired covered employees

Reviewing grants that have been grandfathered for modification

Scheduling the reversal of year end deferred tax asset to determine if when it vests or is exercised that it will not be limited( issue always existed but more focus with tax reform( ASC 740 concern whether you elect cash first method, stock compensation first or pro rata method in assessing the realizability of the DTA))

211

Overview of U.S. Taxation of Foreign Earnings

How are the earnings of a foreign company taxed to its US shareholders after tax reform?

General Rule was – a U.S. taxpayer was not subject to taxation on the earnings of a foreign subsidiary until the earnings were distributed to the taxpayer with certain exceptions e.g. subpart F income

Post Tax Reform U.S. Outside basis difference concerns – income recognition

Transition tax (Code Sec. 965) – One time tax on untaxed foreign earnings

• Complicated basis adjustment rules as outlined in final regulations issued inJanuary 2019.

Subpart F inclusions – virtually the same as under pre-tax reform and takes precedence over any other inclusions; tax basis adjusted for inclusion.

GILTI inclusions (to be discussed further) – final and proposed regulations issued in June 2019 but did not address basis rules as had been done in the proposed regulations (reserved for future regulation)

212

Accounting For Outside Bases Differences Overview of U.S. Taxation Of Foreign Earnings

Code Sec. 245A – allows for the distribution on a tax free basis of residual income after the previous mandatory inclusions, does not create a basis adjustment for tax purposes but this portion of the outside basis difference (book vs tax) can be recovered tax free.

Code Sec 956 (Investment in U.S. Property)

• Proposed regulations issued in November 2018 and final regulations in May,2019 all but eliminates the impact of Code Sec 956 – regulations limit the application of 956 to instances where an amount would be taxable after the application of Code Sec. 245A– Still need controls in pFails holding period requirement in Code Sec. 245A– Hybrid dividend application in Code Sec 245A

• lace to monitor this if either of above issues are applicable – Need to know client/company position

Need to know and track book vs tax basis

213

Global Intangible Low-Tax Income

Tax Law Change

IRC Sec. 951A has been added to the law which taxes GILTI in a manner similar to Subpart F. Applies whether the income is distributed or not (specifically stated that it is not Subpart F income).

GILTI = Net tested income over its “net deemed tangible income return.”

“Net tested income”=Tested income over tested loss. For this purpose tested income generally includes gross income of the CFC other than:

ECI; Subpart F income; Amounts excluded from Subpart F (954(b)(4)); Dividends received from a related person (954(d)(3)); and Foreign oil & gas extraction income (907(c)(1)). Tested loss means the excess (if any) of deductions (including

taxes) properly allocable to the corporation’s gross income, determined without regard to the tested income exceptions over the amount of such gross income.

Net deemed tangible income return equals 10% of the excess of the CFC’s qualified business asset investment (“QBAI”) over interest expense.

ASC 740 Issues

For GILTI to have an ASC 740 consequence, a company must conclude that it will be a GILTI taxpayer.

As discussed, the rules are complex and will require systems to be developed to track the necessary data to conclude whether the tax applies or does not apply.

Needs to be considered for the 1st Q of 2018 (calendar year) and 2019 (fiscal year) companies in developing effective tax rate.

Query whether companies should recognize deferred taxes for any outside basis differences that are expected to reverse as GILTI.• Unrealized GILTI analogous to unrealized Subpart F

income.

• At the January 18, 2018 meeting, the FASB staff concluded that companies could make a policy election to recognize or not recognize deferred taxes on underlying temporary differences that would reverse as GILTI.

214

Global Intangible Low-Tax Income - continued

Tax Law Change

QBAI is determined as the average of the aggregate of its adjusted bases as of the close of each quarter in specified property. Adjusted basis is determined using the alternative depreciation system under IRC Sec. 168(g).

New IRC Sec. 250 would allow a deduction of 50% of GILTI for the tax years beginning after December 31, 2017 and before January 1, 2026 reduced to 37.5% for years thereafter.

Allows a deemed paid credit equal to 80% of GILTI inclusion amount over aggregate tested income multiplied by the aggregate tested foreign income taxes paid or accrued by all CFCs (GILTI is in its own separate tax credit basket and there is no carryover allowed).

Effective for tax years beginning after December 31, 2017.

ASC 740 Issues

Exception for high tax “kick out” is based upon effective rate – e.g., foreign taxes paid/accrued over E&P earnings and not based upon comparison of US vs. foreign statutory rates.

215

GILTI (cont’d)

For GILTI to have an ASC 740 consequence, a company must conclude that it will be a GILTI taxpayer.

As discussed, the rules are complex and will require systems to be developed to track the necessary data to conclude whether the tax applies or does not apply.

Needs to be considered /projected for quarterly reporting of in developing effective tax rate.

Query whether companies should recognize deferred taxes for any outside basis differences that are expected to reverse as GILTI.

Final regulations issues in June did not address basis issues and reserved this matter for a future regulation project.

216

GILTI (cont’d)

Temporary differences impacting GILTI is analogous to unrealized Subpart F income.

At the January 18, 2018 meeting, the FASB staff concluded that companies could make a policy election to recognize or not recognize US deferred taxes on foreign subsidiary temporary differences that would reverse as GILTI.

Most companies do not provide US deferred taxes for temporary differences impacting GILTI

Exception for high tax “kick out” is based upon effective rate – e.g., foreign taxes paid/accrued over E&P earnings and not based upon comparison of US vs. foreign statutory rates (in June proposed regulations were issued which would allow all high tax earnings and not just subpart F income to be excluded).

217

GILTI (cont)

Valuation allowance considerations GILTI earnings may provide a source of income for realization of US DTA’s which have a

valuation allowance

Reduction of some or all of V/A may be appropriate

Two policy elections available in determining v/a reduction:

Tax law ordering- if GILTI inclusions allow for NOL’s to be utilized, project out NOL utilization and reduce valuation allowance

With and without method- reduce V/A only if there is an incremental cash tax benefit due to NOL’s.

Compute US tax on GILTI earnings with and without the NOL’s. If there is less tax with the NOL’s , reduce V/A by such amount. Need to consider FTC’s and section 250 deduction in this comparison.

218

Accounting For Outside Bases Differences Example GILTI Tested Loss

P

FC2FC1

P’s BOY in FCI = 100P’s tax basis in FC1 = 100

P’s BOY in FC2 = 0P’s BOY tax basis in FC2 = 0

100 tested income100 Book income

50 tested loss0 Book loss

Under the proposed regulations the basis of P’s investment in FC1 was written down at the time of the disposition of FC1 by the utilized tested loss of $50.This rule was not finalized. Under the proposedrules, a suspense account was set up which would have been adjusted when the CFC’s future tested income is offset by a tested loss of another CFC or triggered when the stock of the Subsidiary was sold. The final regulations reserved the basis adjustment rules and they will be addressed in a future regulation project.

Question: Should P record a deferred tax liability for the amount of the tested loss that was absorbed by P?

219

Accounting For Outside Bases Differences Example GILTI Basis Adjustment In Partnership Structure

Year 1• Assume beginning book and tax basis is zero• Assume no foreign taxes paid and no FTCs available• CFC has tested income of $1m• QBAI of $500,000• US Corp and USLP do not own any other CFCs• Assume 35% is held by non-US shareholder partners• Assume no interest expense• Assume zero beginning basis and no other activity• Pursuant to GILTI proposed regulations, US Corp is a US shareholder

partnerin regards to CFC and is required to separately compute its GILTI inclusion with regard to CFC

• USLP does not pass through a separately computed/allocated GILTI amount to US Corp – USLP is treated as a foreign partnership for purposes of computing US Corp’s GILTI inclusion

• US Corp computes a gross GILTI inclusion attributable to CFC of $617,500 and a Section 250 deduction of ($308,750)

• US Corp’s tax basis in USLP is increased by $617,500• However, as USLP is treated as a foreign partnership with regards to

USCorp’s GILTI inclusion, absent further guidance it appears there is not a basis increase in CFC shares held by USLP

• Basis differences• US Corp basis in USLP

• Book - $650,000• Tax - $617,500

• USLP basis in CFC• Book - $1,000,000• Tax - $332,500 (only includes 35% of $1m less 10% of QBAI

amount)

USLP

CFC

US Corp

Other USMinority Owners

(Unrelated)

65% 35%

100%

220

Questions?

221

Merger & Acquisition Trends and Capital Market Update

222

With You Today

MATT BARTHOLOMEWManaging Director, Transaction Advisory Services(801) 456-7531mbartholomew@bdo.com

DAN SHEAManaging Director, BDO Capital(310) 557-8205dshea@bdocap.com

223

Capital Markets Update

BDO Capital Advisors, LLC, a FINRA/SIPC Member Firm, is a separate legal entity and an affiliated company of BDO USA, LLP, a Delaware limited liability partnership and national professional services

firm.

224

Contents

Economic LandscapeCapital FormationM&A ActivityConsiderations Concluding Summary

225

U.S. GDP growth at 2.1% in Q3 2019, the 127th consecutive month of overall economic growth• Federal Reserve median real GDP forecast for the year at 2.2%• Consumer and government spending were still mainstays of economic

growth, while a decrease in business investment weighed on it• The Eurozone GDP expanded 0.2% in Q3 2019; forecast for the year at

1.2%– Other leading economies are similarly soft

Source: U.S. Bureau of Economic Analysis

Economic LandscapeGDP Continues to Show Growth

226

U.S. GDP Growth Rate

-1.0%

2.9%

-0.1%

4.7%

3.2%

1.7%

0.5% 0.5%

3.6%

0.5%

3.2% 3.2%

-1.1%

5.5%

5.0%

2.3%

3.2%3.0%

1.3%

0.1%

2.0%1.9%2.2%

2.0%

2.3%2.2%

3.2%3.5%

2.5%

3.5%

2.9%

1.1%

3.1%

2.0%2.1%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

227

Economic LandscapeManufacturing Base Has Softened Significantly

The ISM PMI index (new orders, inventory levels, production, supplier deliveries and employment) surveys the economic health of our manufacturing sector

November ISM index registered 48.1, down from the 12-month average of 51.8 – “Global trade remains the most significant cross-industry issue.”

4th consecutive month of contraction Only 5 of 18 sectors saw growth

228

Source: ISM (Institute for Supply Management) Report on Business

30

35

40

45

50

55

60

65

70

ISM U.S. Purchasing Managers Index (PMI)

Expansion

Contraction

Economic LandscapeManufacturing Base Has Softened Significantly

229

Economic Landscape Inverted Curve Usually Signals Trouble

Historically, when the yield on the 10-year treasury dips below the yield on the 2-year, a recession has followed

Spread Between 10-year and 2-year Treasuries

Source: St. Louis Federal Reserve, Wells Fargo Investment Institute

230

Economic LandscapeEmployment Picture Remains Bright; Consumers remain Upbeat

Unemployment rate stands at 3.5% for December 2019• Wages have been rising, most sectors continue to add jobs

As such, consumers still feel good• UM survey came in at 99.2 (December 2019) – optimistic re wages,

inflation• Of concern though, aggregate household debt is at record levels - $14T

in Q3’19, surpassing the $13T of leverage in 2008

231

0%

2%

4%

6%

8%

10%

12%

Source: Bureau of Labor Statistics; 1/1/2008 through 8/31/2019

U.S. Unemployment Rate

Source: University of Michigan; 1/1/2008 through 8/31/2019

U.S. Consumer Sentiment

0

20

40

60

80

100

120

Economic LandscapeEmployment Picture Remains Bright; Consumers remain Upbeat

232

Economic LandscapeCapital FormationM&A ActivityConsiderations Concluding Summary

Contents

233

Capital FormationEquity Markets

Volatility but Resiliency• Tariffs• Earnings plateau?• Duration fatigue / Recession concerns

0%

50%

100%

150%

200%

250%

300%

350%

400%

NASDAQ Composite Index (^COMP) Dow Jones Industrial Average (^DJI) S&P 500 (^SPX)

Source: S&P Capital IQ; 1/4/2010 through 12/2/2019

Major U.S. Indices

2017 2018 YTD 2019

Dow Jones 25.08% -5.97% 19.00%

NASDAQ 28.24% -4.38% 28.53%

S&P 500 19.42% -6.24% 24.06%

234

Capital FormationCorporate Profits Leveling

Source: FactSet

$38.71

$41.13 $42.88

$41.32

$38.80

$41.47 $40.96 $42.49 $41.73

$44.84 $46.52

$47.98

$20

$25

$30

$35

$40

$45

$50

Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 Q3'19 Q4'19 Q1'20 Q2'20 Q3'20 Q4'20

S&P 500 Quarterly Median EPS Actuals & Estimates

• Earnings are have flattened but is expected to resume growth in Q1 2020

• Number of companies citing tariffs on earnings calls has increased significantly since Q1 2019 and

• foreign exchange rates has been a heavily-cited negative impact during Q3 2019 earnings calls

235

Capital FormationPE Capital Reserve Balances Remain High

PE firms had approximately $803B of dry powder, or approximately 3.6 years on hand

The run-up in dry powder is largely attributed to strong showings from mega-funds in 2017, which make up greater than 50% of overhang

U.S. & Europe Private Equity Capital Overhang ($B)

Source: PitchBook

Dry

Pow

der

($BN

)

$323.7

$503.7$565.6

$598.5$575.4

$502.8 $500.3 $508.0

$577.6 $582.2$618.7

$671.8

$744.2

$803.0

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*

2011 2012 2013 2014 2015 2016 2017 2018

Cumulative

Over

hang

by

vint

age

236

3.0x 3.1x 3.4x3.0x 3.3x

1.0x 0.8x0.8x

0.9x0.8x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

2015 2016 2017 2018 YTD* 2019

Senior Debt / EBITDA Sub. Debt / EBITDA

Continued access to debt financing has allowed financial buyers to utilize leverage to compete for attractive targets

Subordinated debt as a portion of overall contributions has held steady while equity contribution has been creeping up in recent periods

Capital FormationDebt is Readily Available for Transactions

Debt and Equity Contribution by Year Total Debt/EBITDA Multiples

4.0x 3.9x4.2x

3.9x 4.1x

43.2% 43.4% 44.6% 41.7% 41.0%

13.7% 11.8% 10.8% 11.5% 11.1%

43.0% 44.9% 44.7% 46.8% 47.9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016 2017 2018 YTD* 2019

Senior Debt Sub Debt Equity

Source: Private company data - * mid year 2019

237

152 companies have gone public YTD (down 18.7%), raising over $43.6B (down 4.6%) (data throughDec 6)

190 companies have filed YTD (down 7.0%)

Market volatility has had an impact

Industry mix:

• Healthcare – 43%

• Technology – 25%

• Financial – 12%

• Other - 20%

Capital FormationIPO Issuance

U.S. IPO Issuance

0

10

20

30

40

50

60

70

80

$0

$5

$10

$15

$20

$25

$30

Proceeds ($B) # of IPO's

Source: Renaissance Capital LLC

238

Economic LandscapeCapital FormationM&A ActivityConsiderations Concluding Summary

Contents

239

M&A Activity U.S. Middle Market M&A Activity

The M&A market is more long-term and strategic than the public equity market

Activity in the U.S. middle market has slowed modestly from highs of recent years

Strong buyer appetite supported by an abundance of capital continues

A relative shortage of acquisition targets has created attractive opportunities for sellers

Demographics and need for a succession plan are expected to drive a pickup in middle market activity

240

M&A Activity

Source: S&P Capital IQ; Represents announced deals valued < $500M; YTD through 9/30

U.S. Middle Market M&A Activity

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

Num

ber of TransactionsIm

plie

d En

terp

rise

Val

ue ($

in m

illio

ns)

Implied Enterprise Value ($M) Number of Announced Deals

241

66% of EV currently is in the <$100M range

• Companies between $100M and $250M represent ~20%

The lower middle market provides the best barometer of M&A health

M&A ActivityVolume by Deal Size

U.S. M&A Activity

0%

20%

40%

60%

80%

100%

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2014 2015 2016 2017 2018 2019

Under $100M $100M-$250M $250M-$500M

Source: PitchBook

242

M&A ActivityStrategic vs PE Buyer Closings

Private Equity vs. Strategic, Total Deals

PE buyers play a substantial role in U.S. M&A activity

Fueled by dry powder and access to debt, PE buyers have been stretching valuations and winning auctions

• They are also specializing by industry

• They are investing in consultants, operating partners and white papers

Source: S&P Capital IQ; 1/1/2008 through 6/30/2019 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1H2018

1H2019

Financial Buyer Strategic Buyer

243

1,0641,502

1,143797

1,203 1,415 1,599 1,5402,024 2,116 2,213 2,296

2,667

542 509

1,225

1,374

1,038

617

9431,021

1,197994

1,2091,299 1,200

1,301

1,398

249 212

46%

52% 52%56% 56% 58% 57%

61% 63% 62% 65% 64%66% 69%

71%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Q1'19 Q2'19

Add-On Non Add-On Add-On %

M&A ActivitySignificance of Private Equity Add-Ons

Private equity add-on transactions continue to make up a larger share of U.S. M&A activity, especially in the middle market

Add-ons can be a great means to supercharge valuation, thereby helping to justify the high price of platform investments

Particularly active in lower-end of marketU.S. Add-On % of Buyout Activity

Source: PitchBook; 1/1/2006 through 6/30/2019

244

M&A Activity Valuation Multiples

M&A markets result in cyclical pricing – growth prospects, buyer appetite and quality/mix of companies sold are key determinants of the average multiple in a given period

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD'19Median EV/EBITDA 8.4x 8.0x 8.0x 7.9x 8.7x 10.2x 9.0x 9.8x 9.9x 7.5x 8.9x 9.2x 8.3x 9.4x 9.2x 8.4x 8.5x 9.0x 9.0x 9.1x% Change YOY -4% 0% -1% 11% 17% -12% 9% 1% -24% 18% 4% -10% 13% -2% -9% 1% 6% 0%

8.4x

8.0x 8.0x 7.9x

8.7x

10.2x

9.0x

9.8x 9.9x

7.5x

8.9x

9.2x

8.3x

9.4x9.2x

8.4x8.5x

9.0x 9.0x 9.1x

6.0x

7.0x

8.0x

9.0x

10.0x

11.0x

EV/E

BITD

A

U.S. Historic EV/EBITDA Multiples

Source: S&P Capital IQ; Represents closed deal valued < $500M with EV/EBITDA multiples between 3x and 20x; YTD through 9/30

10-Yr Average: 8.7x

245

M&A Activity 2019 Utah

Overall volume is slightly down from 2018

Keep in mind this is angels, seed rounds, early stage VC, M&A, buyout/LBOs, JVs

2019 (in millions)

$8,000 - Qualtrics-SAP (Provo)

$735 - Spring Communications (SLC)

$680 – Control4 (SLC)

$335 – Simplifile (Provo)

$300 – NetDocuments (Lehi)

$280 – Workfront (Lehi)

$200 – Divvy (Lehi); $600 valuation

$200 – iFit (Logan)

Announced – Jul 9: DigiCert (Lehi) – undisclosed / likely +$2,000 / still closing

Announced - Dec 4: Instructure (SLC) / Thoma Bravo - ~$2,000 aggregate EV

Announced – Dec 5: Layton construction merging with NY-based STO Building Group ($7,000 revenue)

IPOs – Health Catalyst ($100 on Series F in Feb; $182 from IPO in July; valuation at ~$900)

246

Economic LandscapeCapital FormationM&A ActivityConsiderations Concluding Summary

Contents

247

Corporate Buyers (large, publicly traded Corp Consolidators)

• Generally sought by I-Bankers (higher multiple, if public)

• Generally imply reduced level of diligence

• Earn-outs are difficult

• Higher hurdle re: quality of Seller’s systems, controls

P/E better in certain situations

• More autonomy for senior Mgmt / less concern for staff

• Frequently encourage Mgmt team to retain minority stake

• Seller wishes to stay in the business

• The ‘A’ funds typically avoid auctions

Selling ConsiderationsExit Strategies: Corporate vs. PE Buyer

248

Diligence the short list before exclusivity/LOI signed

Discuss reputation with bankers/attorneys

Call CFO at one of their existing portfolio companies – before LOI is signed

• How ‘hands on’ is the PE team?

• Understand monthly reporting requirements

• Discuss leverage!

Note: The ‘A’ teams avoid auctions

Selling ConsiderationsWho are the ‘good’ PE Buyers?

249

PE Funds are looking for solid management teams with a solid infrastructure

Corp Buyers focus more on the actual products/ services and less on the team

EBITDA – Use TTM calculation; not projection

Strong recurring customer base

Balance sheet strength (own vs. lease) not necessarily an issue

Seller ConsiderationsValue Drivers

250

EBITDA – Recurring EBITDA; Not a simple f/s calc

Potential adjustments:

• Customer losses/wins, recent change in pricing

• Upside from new facility / improved process

• Post-deal purchase of leased assets

• Include SG&A synergies (some Buyers will pay for it)

Adjustments must be supported

Some buyers do not distinguish between EBITDA and Free Cash Flows in heavy CapEx businesses!

Seller ConsiderationsEBITDA

251

Stale inventories

Delayed pay increases for staff

Bonus deferrals

Recent, significant customer losses

Channel stuffing

Seller ConsiderationsEBITDA Manipulation – It Will Be Discovered

252

Include more, as opposed to less. However, DO NOT overpopulate the data room

Everything must flow and tie/reconcile

Start at the monthly trial balance level

Include G/L detail for certain accounts (e.g., SG&A)

Be prepared to update certain analyses at least once

Redact employee names and customer information – especially if competitors are involved

Ensure that the business narrative is conveying what the numbers demonstrate.

Where the story doesn’t fit the numbers, any momentum in a transaction quick falls apart.

Great investment bankers and other advisors can greatly help in this area to sustain and build confidence in the business.

Seller ConsiderationsData Room Management

253

Be prepared

Make sure your add-backs are supported!

TTM EBITDA is the bogey. NEVER accelerate earnings in that 12th month.

Be responsive to data requests; explain delays

Projections must easily bridge from historical results

Disclose the warts! Loss of confidence will kill the deal!

If a publicly traded buyer or the Seller is receiving equity in Buyer, consider reverse diligence!

Seller ConsiderationsDo’s and Don’ts

254

Include your EBITDA multiple in the draft LOI. Also include the TTM dates you are basing it on

Consider requesting a break-up fee

Negotiate a high PEG $ amount for Closing Date working capital

Be very conscious of your data requests; Don’t overload the Seller’s team

Request TTM updates as soon as the books are closed; be skeptical of delays with the final month (just prior to close)

Avoid earn-outs unless they are accomplished in the short-term and there is a high degree of confidence in achieving

Can lead to a challenging partnership

Buyer ConsiderationsDo’s and Don’ts

255

Consider adding a targeted peg $ amount in the LOI. Back-end negotiation of the peg $ can bite you.

Have your TAS services provider discuss PSA working capital definitions with counsel:

• If Buyer, push for “GAAP” calculation of closing date W/C. The more wiggle room, the better.

• If Seller, push for “past practices”. Prepare PSA exhibits detailing methodologies for account classes involving subjectivity!

• Avoid “consistent with GAAP and past practices”

Post-Closing Working Capital True-Ups

256

If it looks like you are headed for arbitration, call in the Professionals immediately. Make sure your Professional is experienced w/ post-closing true ups and has been through the arbitration process!

Try to settle before arbitration

• Expensive process

• End result frequently reliant on the quality of the Arbiter

The most important part of the process is your selection of the Arbiter. Check references!

Arbiter engagement letter should cap fees and include procedures designed to keep costs low

Post-Closing Working Capital True-Ups - Arbitration

257

Third party Transaction Advisory Services (“TAS”) reports are becoming commonplace

• Generally required by independent boards, investment committees and lenders

• Diligence is time consuming and deadline sensitive

Other benefits:

• Serves as an ‘Insurance Policy’ against doing a bad deal

• True experts provide detailed guidance and support throughout the process

• Easier to re-trade deal if based on TAS report

• Good cop / bad cop approach

TAS Service Provider Benefits – Buy Side

258

Up front notification of deal issues/concerns

Remove significant stress/strain from Seller’s team

Add credibility to the process

Allows multiple parties to perform detailed financial diligence at the same time

May allow for a more definitive bid price in an auction process as Bidders are more confident in the $ data

Work in conjunction with I-bankers

Significant cost/benefit

TAS Service Provider Benefits – Sell Side

259

Recent proliferation of service providers confusing the marketplace

Discussions between Lenders and TAS service providers (regarding Key Findings from Financial Diligence) are standard and comprehensive

Never go with the low-cost provider. A competent TAS professional will more than pay for their fee.

TAS Service Provider Selection

260

Require a detailed scope of services

Require fixed fee, with up-front notification of any scope creep. Scope creep is a big problem

Understand extent of Partner involvement

Check references

• Ask for client names; you may know one

• Lender references

• Ask for a redacted report example

TAS Service Provider SelectionAvoid the Pretenders

261

Economic LandscapeCapital FormationM&A ActivityConcluding Summary

Contents

262

Clock keeps ticking on historic duration of economic recovery

• Major economies showing weakness• Fed is working to prolong the up cycle• Consumer appears to be the most optimistic

Equity markets recovered nicely from last year’s decline and flatness during Q2 and Q3

Tariffs, labor shortages and rising input costs are challenging corporate profits

Election year uncertainty: tax policy, regulatory environment, paralysis in DC

Markets still accessible with high valuations, abundant cash and available debt capital

• It remains a sellers market Companies/owners with strategic liquidity and capital formation objectives should

consider acting aggressively to ensure execution within window of opportunity

Utah continues on a strong, albeit slightly tempered, M&A level in 2019

If contemplating or amidst a buy or sell process, call BDO!

Concluding Summary

263

Questions?

264

BDO KNOWS:

Total Tax Liability

265

With You Today

SPENCER STRICKLANDTax Partner

(801) 456-5110

sstrickland@bdo.com

266

BDO 2019 Tax Outlook SurveyTOP 5 TAKEAWAYS

1 With a market downturn likely drawing closer, now is the time for businesses to optimize their total tax liability.

2 As the tax function evolves, tax professionals’ digital and soft skills are deemed equally important as their technical tax prowess.

3 Tax execs want automated processes to help them work smarter, but indicate it will take time for digitalization to be fully realized.

4 U.S. federal tax reform and state and local tax changes are both weighing on tax execs.

5While companies are still adapting to BEPS implementation, significant shifts to global taxes lie ahead as international trade relationships shift and the concept of digital taxation gains momentum.

267

Questions?

What is Total

Tax Liability?

268

Total Tax Liability Overview

269

Total Tax Liability is the sum amount of all taxes owed, factoring in income, indirect, property, payroll, excise and other taxes as well as credits, incentives, customs, duties and deductions at the international, federal, state and local levels.

Total Tax Liability Overview

Total Tax Liability

Income Indirect Property Payroll Excise Credits Incentives Customs Duties

270

Understanding is key to a successful comprehensive tax strategy. At BDO, our role as a strategic advisor is to identify, communicate, and optimize your total tax liability.

Focused on Your Total Tax Liability

A Successful Comprehensive Tax Strategy

Identify

Communicate

Optimize

271

ELEVATING THE TAX FUNCTIONObjectiveProvide quick and accurate insights required to make tax-weighted business decisions

What’s RequiredA complete and accurate view of your total tax liability

How Do We Get ThereDefine where you are on a tax transformation roadmap that identifies the people, process, data and technology required to deliver on that objective

We’ve All Heard That We Need to be More Strategic…Changing regulatory landscape, advances in data science, and challenges with legacy systems have created a perfect storm. Tax departments must master a new set of capabilities.

Technical Expert

Strategist Data Scientist

Technologist

272

IMPACT OF THE REALITYResource constraintsInvestments in data, technology, people have been difficult to justify

Lacking timely access to the right dataThe current reporting mechanisms and systems require too much work to get a timely and accurate picture

Missing a Seat at the tableToo often we’re brought in after decisions have been made

Overly focused on the day-to-dayThe organization needs us to make sure the ‘trains run on time’ and there’s no time to be strategic

More Often Than Not Our Tax Department Looks Like This

273

How Are These Business Forces Impacting Your Organization?

Foreign Jurisdictions

Tax Code Changes

Tariffs & Trade

Technology

Cost Reduction

Demand for Business Insights

Digital Taxation

Risk & Transparency

Given the impact of these business drivers and external forces, how would you rank the importance of the following tax strategies in your organization?

1. Minimize effective tax rate

2. Minimize cash tax expense3. Reduce risk exposure

4. Improve operational efficiencies

274

CFO Board

Lega

What’s the view of the department from your

INTERNAL stakeholders?

What’s the view of the department from your EXTERNAL stakeholders?

Where do you have advocates or detractors?

Where does the biggest criticism come from?

Where does the greatest praise come from?

Keep me out of jail!

Show me the money!

Just hit the deadlines!

What is the risk profile of each stakeholder?

Material weakness?

Significant Deficiency

Can we benchmark?

What’s the Perspective of the Tax Department?

CEO

360° VIEWOF YOUR

TAX FUNCTION

CFO

Owner / Shareholder

Board

LegalIT

HR Other?

275

World class tax functions understand with confidence their total tax liability

They have an accurate view of their current posture and how potential decisions would impact it in the future

They have a seat at the table and can play a proactive role in business decisions

They execute efficiently on the fundamentals to create the capacity to be strategic

They achieve this advantage by building the right infrastructure of data, technology, process and people

Building a World Class Tax Function

Every organization is somewhere on the journey to world class

276

10 World ClassWe’re in the top 10% of all organizations

5 AverageWe’re on par with average organizations of our size

0 Work-in-ProgressWe have significant opportunity to improve

People

Tax function organization design• Are you staffed with the right number of resources?

• Are your team members in the right roles to be successful?

Do they have the skills required to succeed in a dynamic tax landscape?• Ability to adapt to technology changes?

• Ability to communicate tax strategies to broader business stakeholders?

• Comfort and familiarity with emerging technology?

• Expertise in data analytics?

277

10 World ClassWe’re in the top 10% of all organizations

5 AverageWe’re on par with average organizations of our size

0 Work-in-ProgressWe have significant opportunity to improve

Process

Have you mapped your key tax workflows?

Do you know where your team is spending the most time? Is that optimal?

Which of the following KPIs are you tracking, and which one has an opportunity to improve?• Record-to-report cycle length

• Internal controls and transparency

• Risk exposure

278

10 World ClassWe’re in the top 10% of all organizations

5 AverageWe’re on par with average organizations of our size

0 Work-in-ProgressWe have significant opportunity to improve

Data

How accurate is the data being provided from the business?

Is there integrity in the data as it passes through multiple systems and functions?

Can the data be accessed in real-time or as-needed to inform key business decisions?

Are the data sets complete, or do they require manual interventions to reconcile and append data?

Is the data provided in a timely manner to meet compliance, reporting and business deadlines?

Does your company have a documented information or data governance program that is used across the enterprise, including in the tax department?

Is tax data maintained, stored and/or preserved to meet the organization’s legal, regulatory and business needs?

279

10 World ClassWe’re in the top 10% of all organizations

5 AverageWe’re on par with average organizations of our size

0 Work-in-ProgressWe have significant opportunity to improve

Technology

How are you leveraging technology to gain efficiencies, unlock insights and create value?

How are data analytics being deployed to provide a holistic view of your tax posture?

How are you using AI to support and automate workflows?

How are data visualization tools being used to help identify and communicate insights back to the business?

What core tax processes have been automated or outsourced to free up time for your team to focus on tax strategies?

How does technology help integrate data from disparate systems into a centralized ‘data lake’ for reporting and analysis purposes?

280

Example Total Tax Liability Dashboard

281

EXAMPLE TOTAL TAX LIABILITY DASHBOARDState View

282

EXAMPLE TOTAL TAX LIABILITY DASHBOARDCountry View

283

Questions?

284

The Impact of Wayfair -One Year Later

285

With You Today

STEVE OLDROYDState and Local TaxManaging Director

(408) 352-1994soldroyd@bdo.com

286

Discussion Topics:

Wayfair update – one year later• Legislative front

• Open issues

• Litigation

Marketplace Facilitators update• Definition of Marketplace Facilitator

• Nexus

• Taxability

• Tax collections

• Seller vs. Marketplace responsibility

• ASC 450 – Sales Tax Reserves

287

Pre-Wayfair sales tax nexus standard: • Bright-line, physical-presence rule

- Quill Corp. v. North Dakota (1992)- National Bellas Hess v. Illinois (1967)

At issue in the Wayfair case:• South Dakota’s economic nexus for sales/use taxes:

- $100,000 of sales delivered into South Dakota, or - 200 or more separate transactions for delivery into

South Dakota

The U.S. Supreme Court held that the physical presence rule was “unsound and incorrect” and overruled Quill (1992).

South Dakota v. Wayfair (June 21, 2018)

The decision is not limited to sales and use taxes.

It also removes the physical-presence rule for purposes of income, franchise, and gross receipts taxes.

288

States with Sales/Use Tax Economic Nexus Laws(as of 9/9/2019)

www.bdo.com/wayfair

Enacted statute, regulation, or bulletin

Statute/Rule not enacted to date*

RI

CA

OR

WA

NVUT

AZNM

CO

MT

WY

ID

ND

SD

KS

NE

OK

LATX

MO

AR

IA

MN

WI

IL IN

TN

KY

ALMS

FL

GA

MI

SC

NC

WVVA

PA

OH

NY

ME

NH

DE

DC

HI

VT

MD

CT

AK

*DE, MT, NH, OR have no sales/use tax**Nome, AK imposes economic nexus

289

Remote Sellers Chart

290

Non-Conformity with Sales/Use Tax Imposition

Safe harbors / thresholds• Sales volume <> $100K

• Transactions <> 200

• “and” or “or”

Which sales count towards thresholds?• All sales (WI)

• Exclude sales for resale (IL)

Test periods• Current & prior calendar year (SD)

• Current & prior fiscal year (WI)

• Prior 12-months (OK, PA)

• Every quarter (IL)

Non-filing penalties (even if all retail sales are exempt)• Kentucky

• New Jersey

291

State Legislation: Florida

• S. 126 (filed 8/14/19) – proposed eff. date 10/1/2020• H. 159 (filed 9/12/19) – similar

Missouri• Various bills introduced Jan. 2019 all failed – adjourned

Kansas• S. 22 (vetoed 3/26/19)

Legislative Update: Sales/Use Tax Economic Nexus

Florida & Missouri still have not adopted

economic nexus

Kansas 8/1/19:

• DOR Notice 19-04 9/30/19:

• AG Opinion 2019-8

292

Local Ordinances: Alaska

• Nome (eff. 9/1/19)

Colorado (home rule / self-collected jurisdictions)• Boulder: acknowledged – no economic nexus• But, two (2) home rule cities have taken Kansas’ approach!

Louisiana Alabama

Legislative Update: Sales/Use Tax Economic Nexus

Chicago No economic nexus

293

Legal Issues:

US Supreme Court’s comments about South Dakota• No retroactivity

• Safe harbor

• Streamlined member state

294

Legal Issues:

Retroactivity (pre-June 21, 2018)• Rhode Island (eff. 8/17/17)

• Massachusetts (eff. 10/1/17)

• Ohio (eff. 1/1/18)

Academic issue only?• Physical nexus

• Agency nexus

• Notice & reporting laws

• Cookie nexus

295

Legal Issues:

Application of “economic nexus” rule:• Only to sales of “tangible personal property”?

• Services, too? If yes, how are sales of services sourced?

296

Legal Issues:

Proposed Federal Legislation – regarding sales tax- HR 1933 / S.2350, Online Sales Simplicity and Small Business Relief Act of 2019

- H.R. 379, Protecting Businesses from Burdensome Compliance Cost Act of 2019

- S. 128, Stop Taxing Our Potential Act of 2019

- H.R. 1725 / S. 765, Digital Goods and Services Tax Fairness Act of 2019

297

PRACTICAL IMPACT TO BUSINESSES

298

Businesses Impacted

Retail and Consumer Products• e-Commerce• Service providers

Technology• Online services (SaaS, sellers of digital products)

Private Equity/M&A• PE firms and strategic buyers will need to address Wayfair exposure and ongoing

compliance requirements of their portfolio companies and targets.

Non-U.S. Businesses• U.S. tax treaties generally do not apply at the state level.• A foreign business with no US permanent establishment may still be subject to state

economic nexus provisions.

All industries are likely to see an impact from the Wayfair decision, but these are likely the most widely impacted.

299

Tax Types Impacted

Sales/use taxes Gross receipts taxes State corporate income taxes

• Caveat: Public Law 86-272 still applies!

State franchise taxes

300

When Parties Other Than the Retailer May Be Required to Collect Sales Tax

301

When Parties Other Than the Retail Seller May Be Responsible for Collecting and Remitting Sales/Use Taxes

Examples:• Drop Shipments

• Auctioneer Rules

• Consignment Sale Rules

• Marketplace Facilitators

302

Marketplace Facilitator Sales Tax Laws

303

AK, DE, MT, NH, OR have no states sales/use tax

**Nome, AK imposes economic nexus

States with Marketplace Facilitator Rules(as of 11/27/2019)

CA

OR

WA

NV

UT

AZNM

CO

MT

WY

ID

ND

SD

KS

NE

OK

LATX

MO

AR

IA

MN

WI

IL IN

TN

KY

ALMS

FL

GA

MI

SC

NC

WVVA

PA

OH

NY

ME

NH

DE

RI

DC

HI

AK

VT

MD

CT

MA

HI

Enacted statute/rule/admin

Statute/Rule not enacted to date

304

BDO Marketplace Facilitators Chart

305

Top Marketplace Facilitator Issues

1. Definition of marketplace facilitator/provider• Narrow Def

- The narrow definition requires direct or indirect processing or collection of the customer’s payment by the marketplace facilitator/provider

- 18 + DC has adopted this definition

• Broader Def

- May not require direct or indirect processing

- 15 have adopted this definition

• Work Group expressed a strong preference for the narrow definition

- because the broad definition leads to more uncertainty and

- If the MPF does not directly or indirectly process or collect the payment they cannot practically comply with the tax collection requirement.

• Exclusion of industries

305

- Payment processors- Advertiser- Delivery services- Destination Management Services– travel agencies

- Peer-to-peer car sharing/Facilitation of car sharing- Car rental - Lodging

306

Top Marketplace Facilitator Issues

2. Who is the retailer?

• Most states that have enacted MPF collection requirements treat the MPF as the “retailer” under their sales/use tax laws and

• assumes the retailer’s rights and obligations under those laws

- claiming bad debts,

- vendor compensation,

- handling refunds,

- recordkeeping, etc.

• Work Group expressed a strong preference for that treatment

3. Remote seller and marketplace seller vs. marketplace facilitator/provider recordkeeping, audit exposure/liability protection

• Most states provide that the MPF is subject to audit and liability for failure to properly collect sales/use tax, not the marketplace seller.

• Unless the MPF can show failure to collect was due to the marketplace seller providing erroneous information

• Work Group suggested that states should look solely to the MPF for recordkeeping, audit and liability for non-collection of sales/use tax

• MPF & MPS can negotiate the liability risk contractually

4. Marketplace seller-marketplace facilitator/provider information requirements

• Information requirements between the MPS and MPF should be clear and standardized

307

Top Marketplace Facilitator Issues

5. Collection responsibility determination• Most of the states do not permit the MPF & MPS to negotiate which party has the collection and reporting

responsibility and

• do not allow the state tax agency to waive that collection or reporting requirement

• Most states have collection requirements generally apply those to the full extent of their tax bases: retail sales of tangible personal property, taxable services, and taxable digital products.

- a few states have limited the marketplace facilitator/provider collection requirements to sales of tangible personal property

• Other Taxes

- Generally, state laws requiring MPF collect tax is limited to sales tax only.- Telecom, occupancy, excise

6. Marketplace seller economic nexus threshold calculation• Most states collection requirements include in the economic nexus threshold for MPS’ both direct and facilitated

sales.

• 8+ states that have recently enacted MPF requirements only include direct sales in the MPS’ economic nexus threshold.

308

Top Marketplace Facilitator Issues

7. Remote Seller sales/use tax economic nexus threshold issues

• if the sales volume threshold includes sales for resale, then wholesalers may be required to register and file “zero” returns

• 10+ states include only retail sales

• 2 states include only taxable sales

• 13 states have excluded transaction thresholds

• 2 states have required both $ and # to be met

8. Certification requirement – How does the marketplace seller know the tax was collected?

• 11+ states require the MPF to certify to the MPS that the MPF is collecting the tax

- Shifts the audit burden to the MPF

9. Information sharing • Federation of Tax Administrators (FTA)

- Process already exists with the FTA

- Tax Audits – working papers

- SITR

- Registrations10. Taxability determination

• Business participants strongly recommended that state tax agencies should publish specific guidance to assist remote sellers in quickly determining the taxability of items

309

Top Marketplace Facilitator Issues

11. Return simplification• States should consider whether it is necessary for the marketplace seller to report facilitated sales on its return, if

the marketplace facilitator/provider is registered and collecting sales/use tax on those sales.

12. Foreign sellers – need clear guidance on registration and collection• No treaty protection

• Enforcement obstacles

• Foreign sellers are finding it difficult to register

- SSN#- FEIN#- U.S. bank account

13. Local Home Rule

• Tax base may differ

• Simplified tax rate for remote sellers

- AL- LA- TX

• Origin base sourcing is still an issue.

• Different rates for in-state and remote sellers.

310

Example States

311

Responsibility Chart

CONNECTICUT SOUTH DAKOTA CALIFORNIA NEW YORK

Who is required to be registered?

Marketplace must register.Seller if they exceed economic

nexus standards.

Marketplace if they exceed economic nexus standards. Seller (may) if they exceed economic

nexus standards.

Marketplace because they are considered the seller and the retailer for sales made thru the marketplace. Seller must register

if they make sales on their own behalf. Seller not required if sales are made

exclusively through marketplace.

Marketplace is required to register for sales made through the

marketplace.

Who is responsible for the tax?

Marketplace unless the seller can show that such sale was properly

facilitated by facilitator andAny failure of facilitator to

collect the proper amount of tax for sale was not the result of

seller providing incorrect information.

Marketplace if they exceed the economic nexus standards. If

Marketplace is remitting, then the seller is not responsible.

Marketplace if they exceed the economic nexus thresholds, then it is required to

remit sales tax on all sales made through its marketplace.

Seller is not responsible for sales tax made through that marketplace, if Marketplace is

submitting tax.

Marketplace is required to collect sales tax on all taxable sales through the marketplace even if the seller is

registered for sales tax purposes.

What exemption documentation is required?

Seller must either (1) have a contract that explicitly provides the facilitator will collect and remit sales tax on all taxable

sales, or (2) a properly completed Form DRS-055 – Certificate of

Collection.

Marketplace providers must provide notice to marketplace sellers that SD sales tax is being reported and remitted on all marketplace sales.

Seller is making a resale to the marketplace.

CA “recommended” that the marketplace facilitator provide documentation to the

marketplace seller that indicates the marketplace facilitator is registered,

collecting and remitting tax on marketplace sales. Seller should obtain the marketplace

facilitators seller’s permit or account number.

Marketplace must issue Form ST-150, Marketplace Provider Certificate of

Collection, to its marketplace sellers for sales of TPP that it facilitates for

sellers.

Who is responsible for audit?

Marketplace will be responsible for any audit deficiency for sales

facilitated through its forum.

Liability relief - if the failure was due to incorrect/insufficient information provided by the

marketplace seller. The relief may not exceed 5% of the total sales tax

due for sales through the marketplace.

Marketplace.

Marketplace and Seller. Marketplace is relieved from liability if it can show that the error was due to incorrect or insufficient information given by the marketplace seller. Same for Seller.

312

Sales Tax Compliance:A Strategic Approach

313

Contingencies and liabilities

314

Liabilities

A liability is a known obligation

Indirect taxes tend to be liabilities rather than contingencies Indirect taxes are not contingencies if the laws of the taxing jurisdictions

clearly apply to the transactionsReserve analysis often contains both liabilities and contingencies

315

ASC 450:Contingencies

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ASC 450: Contingencies

An existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss that will ultimately be resolved when one or more future events occur or fail to occur.

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ASC 450: Contingencies

ASC 450 establishes standards of financial accounting and reporting for loss contingencies and gain contingencies, including standards for disclosure.

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ASC 450: Gain Contingencies

Recognition:• A contingency that might result in a gain should not be reflected in the

financial statements.• To do so might be to recognize revenue before its realization.

Disclosure:• Adequate disclosure shall be made of a contingency that might result in a

gain.

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ASC 450: Loss Contingencies

Recognition:An estimated loss from a loss contingency is accrued by a charge to income if:

1. It is probable that an asset has been impaired or a liability had been incurred; and

2. The amount of the loss can be reasonably estimated.

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ASC 450: Loss Contingencies

Probable? Likelihood that future event(s) will confirm the liability:• Remote: the change of the future event(s) is slight

• Reasonably possible: the chance of the future events(s) is more than remote, but less than likely

• Probable: the future event(s) are likely to occur

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Terms to remember

Likelihood of a Loss Loss Reasonably Estimable Loss Not Reasonably Estimable

Probable • Accrue loss contingency• Disclose nature of contingency

and amount if necessary, to avoid making financial statements misleading

• Disclose• Provide estimate of possible loss

or range of possible loss or indicate estimate not possible

Reasonably Possible • Accrual not required• Disclose nature and estimate

of possible loss

• Disclose• Provide estimate of possible loss

or indicate estimate not possible

Remote No action required No action required

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What Constitutes a“Contingency”

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ASC 450: Contingencies

ASC 450 – and its accrual & disclosure standard – applies when there’s a “contingency”

“Contingency” defined:An existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an entity that will ultimately be resolved when one or more future events occur or fail to occur.

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ASC 450: Contingencies

“Contingencies” – what we know: No accrual for general or unspecified business risks. No disclosure required for a loss contingency for unasserted claim/assessment

if no manifestation by a potential claimant of an awareness of a possible claim/assessment, unless BOTH:

1. Considered probable that claim will be asserted

2. A reasonable possibility that outcome will be unfavorable

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Is “audit lottery” a “contingency”?

ASC 450 is silent. ASC 740, Income Taxes, states:

1. It is presumed that a tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information

2. A tax position’s technical merits are based on the law as applied to the facts.

3. Each tax position is evaluated without consideration of the possibility of offset or aggregation of other positions.

ASC 450: Contingencies

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The Estimated Liability

At Balance Sheet Date

Best estimate of the probable amount due

• under the applicable state & local laws Audit lottery or detection risk is not allowed

• All jurisdictions will be audited and all tax liabilities will be discovered Tax reserve must include amounts for interest and penalties

Estimated reserves for settlements may be acceptable

• Settlement or Voluntary Disclosure Programs.– Reduced SOL, penalties and interest.

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Releasing reserves

Generally occurs when there are changes related to:

The application of the laws The facts and circumstances Audit adjustments Statute of limitations VDAs Confirmation of customer payments Tax department approaches may be different

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ASC 450 Sales Tax Reserve Calculation

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Sales Tax Reserve Calculation Five Step Approach (Summary)

Step 1 – Determine Nexus and Filing Obligations

Determine where the company may have nexus Determine where the company has a filing obligation Step 2 – Determine the Taxability of Products and Services

Evaluate the Company’s revenue streams to determine the taxability Evaluate the Company’s customer base for possible exemptions Step 3 – Quantify Potential State Tax Exposure

Compile sales tax data Destination based sourcing State & Local Tax, Interest & Penalty Rates Compute Exposure Amount

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Sales Tax RemediationFive Step Approach (Summary)

Step 4 – Mitigation and Disclosure of Historical Liabilities

Filing and Paying All Prior Tax Returns Voluntary Disclosure – Anonymous basis Negotiated Settlement Do Nothing Step 5 – Prospective Compliance

Indirect Tax Automation Utilization of rate software In-house or outsource tax return function

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Questions?

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