Audit News Articles
Got Enough Retained Savings?
By: Dave Thomsen, Partner | email
In the early days of cooperatives, the normal practice was to operate at break-even, and if you made a profit, the member business portion of that profit was allocated back to members. Little, if any, was retained. But if you ask a banker today, he’ll say, “you can never have enough retained savings.”
There has to be a happy medium.
Over the years we have seen cooperatives with allocation policies in place that led from little being retained, to retained amounts equal to regional investments– until the Farmland write down when everyone realized that if all regional equities were lost, all retained savings would be lost as well. The next goal was to increase retained savings to an amount equal to regional investments plus an “additional amount.” That’s basically where we are today. So, now we contemplate what that “additional amount” should be.
There may not be an easy answer to that question. You could do a complete turnaround and start allocating a higher percentage of your earnings, but that could have a negative impact on your balance sheet by reducing working capital and increasing cash requirements for future equity redemptions. Then again, you could continue on your present course and see where it leads.
Some of you have said you can’t divide up that concrete elevator you built, so retained savings should grow to an amount equal to regional investments plus fixed assets. We’ve also brought up the topic of non-qualified patronage dividends with many of you, whereas the balance sheet will basically remain intact while some of the non-allocated retained savings become allocated. But, you must then decide what to do with that equity as a part of your equity redemption policies– redeem or permanently hold? As we said, there is no easy answer; however, it may be time to start some serious discussion on the issue.
From new clients, to those we have been serving for over forty years, we have worked with you to build your balance sheets, including building retained savings. This will continue to be our goal as we continue to work together to answer the question “How much retained savings is enough?”
GASB 54 Fund Classifications
By: Janis Slater, CPA, Manager | email
It is important to review the new Governmental Accounting Standards Board Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, that was issued March 30th, 2009. GASB 54 significantly changed the requirements for reporting fund balances for governmental funds. The new statement clarifies the definitions of individual governmental funds and may change the activities reported in a government’s special revenue fund.
Beginning in fiscal year ending June 30, 2011, governments are required to separately identify amounts that are non-spendable. All other amounts will be classified according to resource constraints. The new classifications are as follows:
Non-spendable Fund Balance – Amounts that are not in spendable form, such as inventory, prepaid amounts and long term receivables, and those that legally or contractually must be kept intact, such as the principal of endowments or revolving loan funds.
Restricted Fund Balance – Amounts that can be used only for specific purposes due to constitutional provisions, enabling legislation or externally imposed constraints, such as restrictions imposed by creditors, grantors or other governments.
Committed Fund Balance – Amounts that can only be used for specific purposes because of a formal action by the government’s highest decision making authority. These constraints are binding unless removed in the same manner in which they were originally committed.
Assigned Fund Balance – Amounts intended for specific purposes but not restricted or committed. The assigned fund balance can never be in excess of the total fund balance less the non-spendable, restricted and committed components of fund balance. Ultimately, this is the residual fund balance for all funds other than General Fund.
Unassigned Fund Balance – The residual classification for the General Fund, the only governmental fund that can report a positive unassigned fund balance. Other funds might have a negative unassigned fund balance due to overspending restricted, committed or assigned amounts. Not all components will always be present in each fund.
This overview of the requirements of GASB Statement 54 is to remind governments of the requirements which are now in effect. Governments will have to restate existing fund balances to conform to the new requirements. Governmental officials need to be educated about the new classifications and disclosures, and it may be necessary to alert third parties about any changes which could affect debt covenants or other requirements.
If more information is needed or if you have questions, feel free to call our Charles City office at 641-228-7096.
An Important W-9 Rule Every Business Must Follow
By: Charles L. Telk Jr., CPA, Senior Tax Adviser | email
We would like to remind our clients of the importance of the new W-9 rules set into effect by recent tax legislation. We cannot stress enough that your attention to this new rule is crucial.
RULE: It is the responsibility of every person, business or entity to have a signed, legible copy of form W-9 on hand for every person, business or entity that it issues a check to. This includes all cooperative members as well. This means that any non-employee you issue money to needs to fill out a W-9 for you to keep on record, regardless of the amount of money you issue them or the number of times in a year that you do so. Yes, that means you could have a lot more W-9 forms to deal with. Unfortunately, there are no exceptions.
Form W-9 is the non-employee equivalent of form W-4. The information contained on a W-9 form for each person, business or entity is used to determine if you will need to file a 1099 form for them.
PENALTY: Even if you think you won’t need to issue a 1099 to a certain person, business or entity, you are still required to have their completed and signed W-9 on file. If you don’t, you run the risk of the IRS disallowing your related tax deductions, and assessing you taxes, penalties and interest.
You should review your contractor, vendor and member files to make certain that you have a signed, legible form W-9 on file for each of them. If any W-9 forms are missing, you need to obtain them. Have your contractors, vendors and members fill them out now.
As we discussed in prior newsletters, there is no valid excuse for a vendor to not provide a signed W-9 form. Should you have any questions regarding this issue or any others, please call us so we can help.
Allocating Patronage Under Section 199
By: Gardiner Thomsen CPAs | email
We would like to inform you of some important points to keep in mind if you plan on allocating some or all of your patronage sourced section 199 deduction to your members.
You have to provide written notice to your members, just like you would regarding their patronage allocation. This notice must be provided within 8 ½ months of your cooperative’s fiscal year end. Members will generally be able to deduct their allocated portion of the section 199 deduction in the year in which they receive notice. So, if your cooperative has an August, 2010 fiscal year end, and decides to allocate your section 199 deduction to your members, if you provide notice prior to December 31, 2010, your members have a 2010 deduction. If your notice is after December 31, 2010, but prior to May 15, 2011 (the 8 ½ month deadline), then your members would have a 2011 deduction. Timing is very crucial.
In addition to the written notice, you must also report the allocation of your patronage sourced section 199 deduction that is allocated to your members on form 1099PATR. This can be confusing because many cooperatives have a non-calendar fiscal year end, whereas 1099 reporting is based on calendar year figures. In our above example, if notice is provided prior to December 31, 2010, then this allocation would go on a 2010 1099PATR. If notice is given after December 31, 2010, but prior to May 15, 2011 (the 8 ½ month deadline), then the allocation would go on a 2011 1099PATR.
Remember, even if your cooperative is allocating all or part of its patronage sourced section 199 deduction to your members, you still have to report Per Unit Retains Paid in Money (PURPIMs) to your patrons on form 1099PATR.
These reporting issues can be very confusing. Please contact us if you have any questions regarding patron notification or 1099 reporting.
1099 Issues From the Past Resurface
By: Gardiner Thomsen CPAs | email
Recently, the IRS began sending out notices related to tax year 2008 1099 forms. These notices detail problems with 1099 forms that our clients have filed, including incorrect or missing FEIN’s, incorrect names on the 1099’s, and other issues. Generally, a penalty for each occurrence is imposed, which could potentially total thousands of dollars for the client.
Now is a good time to review your internal accounting procedures in regard to non-employees. Before issuing a check to anyone who is not an employee, you should obtain a signed W-9 form. The information contained in a W-9 form is what you use to determine if a 1099 is required, and then to prepare form 1099 if it is required.
There are several common excuses that individuals and/or businesses use in order to avoid providing a W-9 form, for example:
- “I’m a corporation, you don’t need to issue me a 1099.” In actuality, it is the W-9 form that communicates this information. You need them to provide you a signed W-9.
- “I’m with the city/county/state/federal government, you won’t need to issue me a 1099.” Every government agency, from federal to a small city, has a FEIN. You need them to provide you a signed W-9.
- “My organization is a non-profit agency. We don’t pay tax.” Every non-profit agency has a FEIN. You need them to provide you with a signed W-9.
- “I take the funds that you pay me and then pay my employees, relatives, church, etc., so you don’t need to issue me a 1099.” The person/organization that you issue the check to is the person that you need the signed W-9 for, and if necessary, the 1099 issued to. If they redistribute the funds, they will need to determine to correct course of action to take regardless of your proper reporting.
- “I’ve been doing business with you for 25 years and I’ve never provided a W-9.” Situation’s like this are the reason why the rules are changing. You need them to provide you a signed W-9.
All of these excuses are invalid. The ideal policy regarding W-9 forms should forbid the issuance of a check to anyone, member or patron, who has not provided you with a signed W-9 form. Penalties are also imposed for incorrect or illegible 1099 forms, so you must have a zero exception policy. It takes resources to try to obtain the correct information after the fact, so get a signed W-9 form prior to anyone expecting payment. If you have any questions, please contact us.
Red Flags Rule… Finally.
By: Gardiner Thomsen CPAs | email
The red flags rule may actually go into affect on December 31, 2010. The Rule was originally supposed to become effective on January 1, 2008, with full compliance required by November 1, 2008. The FTC or Congress has delayed enforcing the Rule a couple of times in the last two years.
The Red Flags Rule was developed under the Fair and Accurate Credit Transactions Act, in which Congress directed the Federal Trade Commission (FTC) and other agencies to develop regulations requiring creditors and financial institutions to address the risk of identity theft. The resulting Rule requires all such entities that have “covered accounts” to develop and implement written identity theft prevention programs to help identify, detect and respond to patterns, practices, or specific activities – known as “red flags” – that could indicate identity theft.
By focusing on red flags now, you’ll be better able to spot an imposter using someone else’s identity to get products or services from you. As a practical matter, the Rule applies to you if you provide products or services and bill customers later.
You can find guidance at www.ftc.gov/redflagsrule. At this website you can find a “How-to Guide for Businesses” and a Do-It-Yourself Prevention Program for Businesses and Organizations at Low Risk for Identity Theft.
Red Flags Rule Enforcement Extended
By: Gardiner Thomsen CPAs | email
The Federal Trade Commission (FTC) has issued regulations known as the “Red Flags Rule” requiring certain entities such as creditors and financial institutions to develop and implement a written Identity Theft Prevention Program. Municipal utilities and governmental entities that defer payment for goods or services are considered creditors for these purposes.
The program should include policies and procedures to identify, detect and respond to patterns, practices or specific activities that indicate the warning signs or “red flags” of potential identity theft in day-to-day operations. It should also state how to mitigate the risks of identity theft and evaluate the program to address new risks. The program must be approved by the governing body, and should include information about training staff and monitoring the work of the entity’s service providers. All members of the entity’s staff must be familiar with the Red Flags Rule and compliance procedures.
Enforcement of the rule has now been extended to December 31, 2010, while Congress considers legislation that would affect the scope of the included entities.
A handbook on developing an Identity Theft Prevention Program and information about compliance is available at http://ftc.gov/redflagsrule. A fill-in-the-blank form for businesses and organizations at low risk for identity theft is available at http://ftc.gov/redflagsrule and offers step-by-step instructions for creating a written Identity Theft Prevention Program. The form can be filled out online and printed.
If you have any questions about the Red Flags Rule or would like further assistance on developing an Identity Theft Prevention Program, please contact us, we would be happy to help.
Blue Ribbon Panel Looks Into Separate GAAP For Private Companies
By: Gardiner Thomsen CPAs | email
Until recently, U.S. generally accepted accounting principles (GAAP) have long been considered universally acceptable for both publicly and privately held companies. However, there have been growing concerns about the specific needs of privately held companies which must report to a narrower range of financial statement users, such as lenders, venture capitalists, and insurers. Current GAAP and standard-setting processes have been viewed as too complex to be useful for private companies and do not benefit the users enough to justify the costs of compliance. Because of this, the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Foundation (FAF) have created a Blue Ribbon Panel to explore how the GAAP and standard setting process are meeting private company needs.
In addition to the costs of funding the standard-setting process and educating financial statement preparers, other issues raised by the panel are: whether a separate set of standards would be useful for private companies; if simplified standards would be useful for all companies, both public and private; or if giving private companies the option of complying with either a new set of simplified standards or reporting as a public company under the current set, would be useful. The panel, made up of various groups including lenders, investors, owners, preparers, auditors, and regulators, is most concerned with putting the decision making process in the hands of the users. The panel will meet throughout the year to discuss these issues in depth and make recommendations on how to better serve the financial reporting needs of both publicly and privately held companies, as wells as the preparers and users of those financial statements.
Gardiner Thomsen will be following this issue and will keep you up to date on any progress or changes that will affect your company. In the meantime, if you have any questions, please don’t hesitate to contact us.
Update on GASB No. 54
By: Gardiner Thomsen CPAs | email
In March of 2009, the Governmental Accounting Standards Board (GASB) issued Statement No. 54, significantly changing the requirements for reporting governmental funds balances beginning in fiscal year ending June 30, 2011. The new statement clarifies the definitions of individual governmental funds and changes some of the activities reported in certain special revenue funds.
This overview of these requirements may seem well in advance of the implementation date, but we feel it is important to address this now. If entities apply the requirements of Statement 54 to their beginning balances for fiscal 2011, (more importantly, to their ending balances for fiscal 2010), implementation would only require tracking increases and decreases during the year to each category, rather than “backing into it” at the end of fiscal 2011. Governments will have to restate existing fund balances to conform to the new requirements. Officials need to be educated about the new classifications and disclosures, and it may be necessary for government officials to alert third parties about changes which could affect debt covenants or other requirements.
If you would like further information on GASB No. 54, including a complete list of the aforementioned governmental funds and their new definitions, please contact us.
Record Retention Guidelines
By: Gardiner Thomsen CPAs | email
Periodically we receive inquiries regarding how long you should keep old records. In general, record retention periods are the same for electronic records and their hard copy counterparts.
Different types of records need to be retained for different time periods depending on laws, IRS and other government or third party requirements.
These guidelines are merely suggestions for determining retention periods and have been prepared from several sources, with particular attention given to IRS regulations regarding tax return limitations. The general rule under those regulations requires you to keep your records for as long as the information is necessary to support the computation of any tax. In most cases, that time period is three years from the due date of the tax return for which the records relate.
In developing your record retention schedule, keep in mind these guidelines as well as other factors that may suggest longer retention periods, such as support for contract covenants, data needed for meeting regulated industry requirements, and information connected to pending or threatened litigation.
Again, this listing is not intended to be all inclusive for every type of record created and maintained in the operation of your business and is only to be used as a general guideline. Please contact us for additional information and assistance in developing your own specific record retention policy.