Best Finance and Accounting Practices for Contractors

1. Best Finance and Accounting Practices for Contractors

2. Scott Swearingen, CPA Assurance and Consulting Partner Construction and Real Estate Leader, Southern California/Phoenix Region Regional Assurance Leader, Southern California/Phoenix Region Matt Gilbert, CPA Tax and Consulting Senior Manager Construction and Real Estate Team Member, Southern California/Phoenix Region Firm Construction and Real Estate Tax Committee Specific areas include: Tax consulting, provision, and compliance services to public and private corporations Multi-state taxation Assistance with implementation of internal controls, Representation of companies under examination by the IRS and state taxing authorities.

3. The Fine Print - Disclaimer

4. Learning Objectives • Identify improvements in your monthly financial statement process • Identify improvements in your year-end financial statement and income tax process • Identify opportunities and requirements for your organization as a result of tax reform • Identify opportunities for improvement in operations that ultimately impact the finance, accounting, and income statement process

5. What we will cover…… • Financial Reporting • Accounting and Tax Practices • Financial Statement Closing Process • Internal controls • Financial Planning and Forecasts • Information Technology Use • Other Items to Consider • Succession Planning – Owners & Employees • Advisory Committees • Record retention and maintenance

7. Why is this important? • Timely and accurate financial information for stakeholders to make informed decisions is paramount! • Understanding how CFMs can have a greater impact • Improved collaboration with external resources of advisors • Strong economies can mask underlying issues……

8. But first, let’s take a poll!

10. Audit vs Review vs Compilation vs Tax Return • Audit – • Performed in accordance with GAAS • Reasonable assurance, not absolute • Consideration of internal controls under GAAS • Examining and corroboration, on test basis, evidence supporting amounts, accounting principles used, and disclosures • Review – • Substantially less in scope than an audit • Inquiries and analytical procedures • Not aware of any material modifications (limited assurance) • Not expressing an opinion

11. Audit vs Review vs Compilation vs Tax Return • Compilation – • Less in scope than an audit and review. • Presentation of financial statements based on representations made by management. • No assurance or verification of information, unless something comes to the accountants attention • Tax Return • Circular 230/ Statements on Standards for Tax Services (“SSTS”) • Reasonable reliance and exercising due diligence

12. Accounting and Tax Practices – The World is Constantly Changing • Revenue Recognition ASC 606 • Lease Standard ASC 842 • Tax Reform

13. Tax Reform – Business Highlights • Lowered corporate tax rate from 35% to 21% • and AMT repealed for corps • New deduction for pass-through income • Limitations on NOLs and interest deductions • Expanded access to simplified accounting methods • Increased expensing for tangible property

14. Tax Rate Changes • For the 2018 tax year and going forward, the highest corporate rate of 21% is 16% lower than the highest individual tax rate of 37% • Is it better to conduct business through a pass-through entity (i.e. partnership, limited liability company, S corporation) or a C corporation? • IT DEPENDS - There is no correct answer for all circumstances – need to consider a number of items (both tax and non-tax)

15. Tax Rate Changes: C-Corporation Myth • Important factors: • The multiple individual rates and new brackets (ranging from 10% - 37%) • The new deduction for pass-through income • “Double Taxation” on funds withdrawn from the C-Corporation • Case by Case basis – but most modeling still proves C-Corporations to be less advantageous given shareholder-level tax

16. Tax Reform Specific - Best Practices • Model impacts of tax law changes for potential new planning opportunities • Evaluate organizational structures for tax efficiency • Exploring Accounting Methods - WIPs important in this analysis • Consider impact of changes on state and local taxes – depends on degree of conformity to federal code • Understanding current GL classifications and new tax law

17. Tax CPA Best Practices • Provide organized, clean, and internally reviewed data • Communication throughout the year • Status of jobs / business performance – YTD as well as forecasts • New/significant items impacting your business (i.e. ownership changes, work in new states, etc.) • Estimated tax payments and cash outlay • Quarterly Checklists • Request from your CPA items needed for tax return preparation in conjunction with financial statement review/audit, if applicable

18. Accounting and Tax Practices – The World is Constantly Changing • Planning meetings with outside advisors • E-mail alerts and newsletter subscriptions • Webcasts • FASB Standards

19. Let’s take a poll!

21. Financial Statement Closing Process

22. Financial Statement Closing Process • Regular and timely reconciliations of balance sheet and income statement accounts • Prepare and review closing checklists for daily, weekly, monthly, quarterly, semi-annually, annually, etc. • ABC – Always Be Closing • Participation in Job/Project Manager Meetings and follow up with Project Managers regularly

23. Financial Statement Closing Process Examples • Balance Sheet • Cash • Accounts Receivable, Contracts and Retentions • Contract Assets - Costs in Excess (Underbillings) • Supplies/Inventory/Uninstalled Materials • Prepaid Expenses • Property and Equipment – Additions, Disposals, Depreciation • Billings in Excess (Overbillings) • Accounts Payable • Accrued Expenses • Loss Provisions • Equity Accounts – Prior period/year adjustments?

24. Financial Statement Closing Process Examples • Income Statement • Contract Schedules – Revenues & Cost of Revenues • Estimated Costs to Complete • Direct and Indirect Overhead – Cost of Revenues & Operating • Labor and Personnel Costs • Depreciation and Amortization • Rent and Lease Expense

25. Financial Statement Closing Process • Controls to identify data entry errors • Perform proper reviews and manual checks – Document This! • Don’t rely entirely on software to do the work for you • Avoid internal control issues (see later slide) • Summary review and review process of financial statements • Comparison to budgets and forecasts

26. Internal Controls • Segregation of Duties, including IT • Documentation of processes • Accounting and Procedures Manual • Review narratives/ walkthroughs and processes • Standard forms, templates and checklists • Evaluate roles and responsibilities • Approval Processes – Subcontractors, Vendor, Customers, etc.

27. Internal Controls – Documenting ASC 606 • Maintain documentation for the Five Step Process: • Contract evaluation • Estimation methodology and assumptions (including determination of whether a contract exists) • If revenue should be recognized over-time, or at a point in time • If more than one performance obligations exists within a contract • Effect of change orders, claims, etc. • Estimates of variable consideration • Important to update as assumptions will change as project progresses towards completion

28. Financial Planning & Forecasts • Best, worst and middle case scenariosfor variations in operations, market and economy • Profit does not equal cash flow • Mind the balance sheet • Monitor results to budget and adjust as needed • Include ratios and benchmarking against the best

29. IT – Business Continuity, Cyber-Security, System Updates / Backups, etc. • Review IT user access rights – who has access and who needs access? • Removing credentials used by former employees and changing shared passwords • Daily backups and systems updates • Business Continuity Plans – • Cybersecurity, Penetration Testing, etc. • Using your system to mine data • Streamline payments to subcontractors and vendors – But follow your controls

30. IT - Software • Are you Accounting Software Shrewd? • JBKnowledge, Inc. “Workflow Strategy” 2018 Construction Tech Report • 65% of respondents have two or few applications that integrate • 29.1% have none • Half of respondents use manual methods and spreadsheets to move data between applications • Does software address current and future needs? • Are my employees properly trained on software?

31. A quick question

33. Other Items: Succession Planning – Owners & Employees • Shareholders/Owners – What is your role? • Key Managers and Employees • Avoid accounting team overload - Train well and often • Attracting – How are you attracting and are your policies/procedures up to date (background checks?)

34. Other Items: Succession Planning – Owners & Employees • Key Managers and Employees (Cont’d) • Retaining – • Performance management and goal setting • Compensation & benefits • Create succession and training programs • Developing - Keep employees engaged • Delegate new duties, research projects, etc.

35. Other Items: Advisory Committees • CPA • Attorney • Bank • Surety & Bonding • Insurance • Investment Advisor • Others?

36. Other Items: Record Retention and Maintenance • Efforts to go paperless require change in review process • Review tools, evidence of sign offs • Instill policies for certain items such as invoices, reimbursements, etc. • Poor or lacking maintenance for financial and operational documents • Board/Shareholder Meeting Minutes • Tax Returns and support

37. So, Moss Adams, how do I accomplish all of this?

38. Tips • Avoid Procrastination • Schedule it! • Leverage down (not dump) • Consider a corporate advisory board • Strategic hiring • Full time • Temporary • Third party consultants • Plan, plan, plan

40. Questions, Discussion, and Thank You!! Scott Swearingen 949 221-4025 Scott.Swearingen@mossadams.com Matt Gilbert 949 623-4171 Matthew.Gilbert@mossadams.com