There are accounting game-changers coming soon and most business leaders aren’t ready for them.
A big change in lease accounting due in January of 2019 will affect every public and private company in Arizona, just like the tax changes and the new rules for recording revenue that took effect for most public companies in January.
The problem is, most companies aren’t ready for the changes. According to LeaseAccelerator, only 13 percent of companies say they are working on implementing the new rules.
So what other accounting changes and concerns are coming down the road that you should know about? Some of Arizona’s best accounting minds offer their views about what you need to know.
What accounting issue does every business leader need to be aware of heading into 2019?
Randy G. Brammer, CPA, CCIFP, audit partner, Wallace Plese + Dreher: “The new Financial Accounting Standards Board (FASB) Lease Accounting Standard eliminates operating leases over 12 months, forcing the net present value of payments to be capitalized as an asset with equal short and long-term liabilities on the balance sheet. Consult your lenders, creditors, and surety since this will impact working capital and net worth ratios.”
Letizia Brentano, tax senior manager, Moss Adams: “Going forward, business leaders should keep in mind the new limitation on business interest expense deductions. In the past, business interest was generally allowed as a deduction. But under tax reform, there’s a limit on the amount of interest businesses can deduct. Leaders should consider that change when taking on new or more debt.”
Michelle L. Flynn, CPA, tax partner, Wallace Plese + Dreher: “The biggest change is the Tax Cuts and Jobs Act of 2017, which is the most significant reform in tax law since 1986. Every business is impacted by tax rate changes and deduction phase outs. The deduction for entertainment-related expenses has been eliminated, including sporting event tickets and clubs organized for business or social purposes.”
Chuck Goodmiller, CPA, co-managing partner, Henry+Horne: “I don’t think one can say what the most important is as every business has different issues. What is big to one is nothing to another. That said, Revenue Recognition is likely the most far-reaching issue of impact and concern. Companies that need to comply with GAAP must be aware of the new accounting standard and have their policies and procedures in place that will ensure they are properly recording revenues. Non-public companies have until January 2019 to adopt the new rules. The new standard was effective for public companies on January 1, 2018. The impact on companies will depend on the environment in which they operate, but it could be complex and significant. Implementation could be more difficult than what companies may be planning, so all business leaders should already be working with their advisors on implementation.”
Alex Marr, Phoenix office managing partner, PricewaterhouseCoopers: “The two biggest issues facing businesses right now are the lease accounting standard and tax reform. The lease standard will affect the make-up of the balance sheet in terms of more debt on the books and will change the income statement to reflect the depreciation and interest expense as opposed to rent expense. This may affect existing credit arrangements and financial covenants that have EBITDA and debt-to-equity metrics. From a tax reform perspective, companies operating across borders may see significant impact on their tax expense.”
Rick Signs, manager, RSM US: “The biggest accounting issue will be the adoption of the new revenue recognition standard (ASC 606: Revenue from Contracts with Customers). This is one of the most historic accounting changes in decades and will go into effect for most privately held businesses in 2019. For many companies, this accounting change could have a significant impact on recorded sales, financial statement disclosures, compensation plans, sales commissions, compliance with financial covenants, and other areas vital to the successful operations of the business.”
What money-saving opportunities are available to business leaders heading into 2019?
Brentano: “The new law allowing temporary 100 percent expensing for certain business assets presents a big savings opportunity for businesses. Prior to tax reform, bonus depreciation was set to phase down, but instead, it’s gone up. The new law provides for significantly accelerated tax deductions over the next few years. To benefit from the opportunity, it could be a good time to invest in capital expenditure.”
Flynn: “Tax planning opportunities for most businesses to maximize the benefit of the new 20 percent deduction for qualified business income, as well as enhanced expensing of business capital assets. This analysis includes a detailed evaluation of wages, capital assets, and entity structure to create the largest tax savings.”
Goodmiller: “I believe your biggest opportunities come with awareness and knowledge. All business leaders should be working with their internal and external advisors to know how all the new changes are going to impact their business. From Revenue Recognition, to accounting for leases and contracts, to tax law changes, just to name a few, the only way to find opportunities is to know the impact and how the rules apply. For instance, an S-Corp may find vast money saving opportunities in converting to a C-Corp, while another may not. So, knowing the impacts of all the changes will lead to knowing the money-saving opportunities.”
Marr: “Two words: Tax planning. With the ever-changing landscape affecting federal and state tax, effective tax planning can help minimize the impact tax reform may have on cash tax.”
Brammer: “Passed in 2017, the Tax Cuts and Jobs Act allows a potential deduction up to 20 percent of qualified business income from pass-through entities. The deduction could reduce income tax liability of business owners on their individual income tax returns for 2018-2025 tax years.”
Jacob Wilkinson, partner and national team leader, RSM US: “Under the new tax law, the biggest opportunity across all businesses will likely be the expensing of capital expenditures. This change will allow an immediate deduction for the cost to acquire new or used property and will impact typical capital expenditures and the structure of business acquisitions.”
What accounting advice do you have for business leaders heading into 2019?
Flynn: “Value communication and proactively engage your outside advisors. Seek professionals that know your business and industry. Invest in experienced, internal accounting management and encourage them to build relationships with outside professionals. As laws, regulations, and business environments constantly change, business owners should surround themselves with professionals that anticipate the future.”
Goodmiller: “Work with your teams and advisors and find out what you don’t know. Too many business leaders discount the effects of new accounting standards. There are so many changes heading our way, that we need to utilize our resources in order to get ahead of and manage the impacts.”
Marr: “Be proactive in your approach to both the lease accounting standard and tax reform. Don’t wait to have important conversations with your financial institutions and tax advisors. It will be critical to stay ahead of the curve as businesses navigate what’s on the horizon.”
Wilkinson: “With significant changes to the tax law and accounting guidance, business leaders need to have the right teams in place. These changes can both positively and negatively impact a business’s bottom line, thus planning early and having the right partners to help navigate many of these complexities will be invaluable.”
Brammer: “You get what you pay for. Invest in strong accounting and finance professionals within your business and outside advisors, and leverage them. Your accountants need to understand your business. Financial data should be used as a tool for operations and not to complete a tax return or audited financial statements.”
Brentano: “Talk to a consultant. If your tax advisor hasn’t reached out to you to talk about tax reform’s impact on your business, set up a meeting and ask for that input. There are opportunities and pitfalls leaders should keep in mind.”
If you want to stay up to date with the latest regulations it might be time to go back to school and take a CMA exam at the end of your (self) study course.