Accounting and Auditing Hot Topics for 2011

1. Accounting and AuditingHot Topics for 2011 Finance and Administration Roundtable Jeff Schragg Patty Brickett Leslie Pine 703-893-0600

2. Agenda • Employee vs. Independent Contractor • Proposed New Lease Accounting Standards (ASC 840) • Update on New Form 1099 Reporting Rules • Other Hot Topics • ASC 820 – Fair Value Measurement • ASC 310 – Receivables • ASC 958-805 – Mergers of Non-Profits and Goodwill • ASC 740 – Accounting for Income Taxes • Increased Number of IRS Examinations

3. Employee vs. Independent Contractor Do you know who your employees are?

4. Do you know who your employees are? Of course you do • Employees are easy to identify… • Onboarding process through HR so all paperwork is in place…Right? • Offices, cubicles, desks and business cards • Laptops, cell phones and organization email addresses • They are at your office “every day” • They receive Forms W-2 to report earnings and withholding • And you know you have Independent Contractors…

5. Do you know who your employees are? But what about volunteers, interns, temporary workers and workers overseas? • There is no IRS classification for volunteers, interns, temporary workers and workers overseas • How are they being handled by your organization?

6. Do you know who your employees are? • The IRS as part of an employment tax National Research Program has embarked on a multiyear study with 500 audits of Tax Exempt Entities expected in 2010, 2011 and 2012

7. Do you know who your employees are? As part of this comprehensive audit, the IRS is focused on • Worker classification - Employee versus Independent Contractor

8. Do you know who your employees are? The IRS is looking at: • Workers who have received Form 1099 • Workers who have received both Form 1099 Miscellaneous and Form W-2 during the audit period • Workers hired as Independent Contractors and converted to employees • Downsized employees rehired as Independent Contractors

9. Do you know who your employees are? How do you determine if you have an “employee” working for you? • Review all facts and circumstances of the workers situation using the factors the IRS has set out at www.irs.gov/taxtopics/tc762.html

10. Do you know who your employees are? Relationship of the Worker and the Organization • What agreements or contracts have been entered with the worker? • What benefits are available to the worker – insurance, pension, contributions, vacation pay, sick pay • How and who provide training for the worker? • How does the organization represent the worker to others? • How long has the worker been providing services to the organization?

11. Do you know who your employees are? Behavioral Control • What instruction is the worker given? • Who determines the methods by which assignments are performed? • Who does the worker contact regarding problems? • What is the work product? • Where does the worker perform services? • What schedule is the worker required to work?

12. Do you know who your employees are? Financial Control • Who provides the worker supplies and equipment? • What expenses are incurred by the worker? • What expenses are reimbursed and how are expenses reimbursed? • Does the worker have other clients or customers? • How is the worker paid? • Can the worker realize a profit or incur a loss on the work?

13. Do you know who your employees are? So what should you do now? BE PREPARED • Internal audit of worker classification and reporting • Generally multi-functional team including Finance, HR, Payroll and Key Management Personnel • Cooperation of overseas offices, if any, necessary • Evaluate all classification utilized by the organization; Independent Contractors, volunteers, interns, temporary employees and overseas workers • Calculate exposure/risk • Evaluate options to correct retroactively and prospectively

14. Tips to Support Independent Contractor Classification • Always have a signed written contract • Only contract with a corporation, partnership or limited liability company • Require written invoices with employer identification number for payment • Do not set the hours of work • Require consultant to provide their own equipment • Pay by work project, not hours or days • Require consultants to pay their own out-of- pocket expenses • Include reimbursed expenses as payments reported on Form 1099 • Do not closely supervise the work • Don’t use consultants for long periods of time • Allow the consultant to work for other organizations

15. Resources • www.irs.gov • Form SS-8 Determination of Worker Status • Publication 15 (Circular E), Employer’s Tax Guide • Publication 15(A), Employer’s Supplemental Tax Guide • Publication 1729, Independent Contractor or Employee

16. Proposed New Lease Accounting Standards Making Sense of the New Lease Accounting Rules

17. Proposed New Lease Accounting Standards • If codified, proposed new accounting rules will represent a radical shift in how entities have accounted for real and personal property leases • The impact on both lessees and owners of the property will be dramatic and perhaps even shocking for some • Although many details remain to be finalized before the new standards for lease accounting are adopted, there is virtually a 100% consensus that broad-based changes will occur

18. Current Standards • Current lease accounting under Generally Accepted Accounting Principles (GAAP) is based on SFAS 13 (now ASC 840), originally issued in 1976 • Under the current standard, leases are characterized as either operating or capital • Operating leases generally are not reflected on an entity’s statement of financial position, and payments made are recorded as rent expense • Tax Accounting Rules for operating vs. capital leases are different than GAAP rules under SFAS 13/ASC 840

19. Why the proposed changes? • The Financial Accounting Standards Board (the FASB) is responding to the public outcry stemming from Enron’s creative accounting debacle • As a natural extension of the Sarbanes-Oxley Act, the Securities and Exchange Commission requested a rewrite of the lease accounting rules • In a 2005 report, the SEC estimated that there is over $1.25 trillion in non-cancelable operating lease obligations not currently recognized in financial statements • Both the FASB and the International Accounting Standards Board (the IASB) were asked to work jointly to increase transparency in lease-related financial statement reporting

20. Issues with the Current Lease Accounting Standards Critics of the current standards contend that: • Operating leases truly give rise to assets and liabilities that should be recorded in an entity’s statement of financial position • Failure to record leases in the statement of financial position does not allow for transparency for the users of financial statements • Comparability of financial statements between entities that account for leases differently is reduced • “Off balance sheet” operating lease obligations translate to significant fixed and contingent liabilities for entities

21. Timing of Proposed New Standards • The FASB and IASB issued a Discussion Paper in March 2009 • An Exposure Draft was issued in August 2010 • While no fixed date has been determined for the issuance of the final standard, it is generally expected that the final standard will be issued mid 2011 and could become effective as early as 2012

22. Proposed Changes to the Standards Lessees: • While the Exposure Draft addresses new accounting rules for both lessors and lessees, the primary focus will be on the basic changes affecting lessees • The lease accounting model contemplated by the new standard is a "right of use" model that assumes that each lease creates an asset (the lessee's right to use the leased asset) and a liability(the future rental payment obligations) • Specifics of the proposed rules provide for the following basic principles: • No further distinction between operating and capital leases • Will apply to all leased business assets with few exceptions and not just real estate leases • No so-called "grandfathered" leases so that all leases in existence as of the effective date of the new standard will be subject to the new accounting rules • A lessee's balance sheet will reflect an asset representing the company's right to use the leased asset, and a liability representing the company's obligation to make rental payments

23. Proposed Changes to the Standards - Continued • Assets and liabilities will be measured on a basis that • Assumes the longest possible lease term that is more likely than not to occur, taking into account the effect of any options to extend or to terminate • Uses an expected outcome technique to reflect the lease payments, including contingent rents (such as percentage rent), residual payments (such as guaranteed residual value payments) or expected payments under term option penalties, and • is updated when changes in facts or circumstances indicate that there would be a significant change in those assets or liabilities since the previous reporting period

24. Proposed Changes to the Standards - Continued Lessors • Lessors will apply either a performance obligation approach or a derecognitionapproach depending on whether the organization retains exposure to significant risks.  • If the organization retains exposure to significant risks of the underlying asset, a performance obligation approach will be used.  Under this approach, the lessor would continue to recognize the underlying asset but would also recognize an asset for the right to receive lease payments and a liability for the obligation to give another organization the right to use the asset.  The liability would be amortized as lease income over the life of the lease and interest income would be recognized as payments are received.  • If the organization does not retain exposure to significant risks of the underlying asset, a derecognition approach will be used.  Under this approach, an organization would account for the lease similar to the current accounting for capital leases, except that it would be required to estimate various options and contingencies in each lease.

25. Impacts of the Proposed New Standards on Nonprofit Organizations The impact of the new standard will have a number of far reaching impacts on nonprofit organizations, particularly those entities that have a substantial number of operating leases. Some of the anticipated impacts that will have immediate effects on nonprofit organizations include: • Substantial internal efforts, process adjustments and expense will need to be put in place and expended in order to learn and implement the new reporting and measurement requirements imposed by the new standard • Higher rents will have to be recorded based on the most likely term and expected outcome technique described above which, based on the impact to financial statements, will require extensive internal analysis and estimates never before required, all of which will result in the addition of significant liabilities to the statement of financial position • debt covenants in debt agreements may be violated or triggered due to material changes in applicable financial ratios

26. Impact of the Proposed New Standards on Nonprofit Organizations - Continued • Nonprofit organizations may seek to alter their leasing strategy to • Own assets instead of leasing where appropriate, or • Reduce lease and extension option terms to create the desired effect on its financial statements

27. Actions Nonprofit Organizations Should Take Now • There is still plenty of time before the new standard becomes effective • However, since the new standard will apply to virtually all business assets and all leases in effect as of the effective date, it would be prudent to start to plan and budget for the affirmative changes to come • Suggested actions would be as follows: • Evaluate the Exposure Draft and the new lease accounting rules, monitor the comments and review the final standard when issued in 2011 • Measure the likely reporting effect across its leasing platform and the potential impact on its statement of financial position • Review the effect of new reporting requirements on existing legal documentation related to its debt obligations and consider whether any affirmative action may be required to be taken with its lenders in advance of the effective date of the new standard

28. Actions Nonprofit Organizations Should Take Now - Continued Budget for and plan to implement an internal review, technology and process changes required by the new rules, including • Educating the appropriate internal groups responsible for assessment, measurement and reporting, and • Determining who will make the difficult judgment calls regarding certain decisions • Reassess your leasing program and requirements to take the appropriate strategic action (e.g., lease v. own, shorter terms, fewer options, etc.) to minimize the impact of the new standard

29. Summary • The proposed rule changes related to the new lease accounting standard could have a significant effect on an entity’s financial statements • While the effective date of the new standard is not immediate, it will take some time for your organization to understand the implications of the rule changes and to prepare internally for the new measurement and reporting obligations

30. 2010 Patient Protection and Affordable Care Act / Creating Small Business Jobs Act of 2010 • Changed Form 1099 reporting rules to pay for health care changes ($17.1 billion - PPA, $2.5 billion - CSBJA) • CSBJA increased information return filing penalties ($421 million) • Current Law – IRC 6041 • Trade or business must provide • Form 1099 for taxable income payments over $600 • Major exception for corporations (except those providing medical care or legal services) • Major exception for purchased goods • Major exception for “Gross Proceeds”

31. 2010 Patient Protection and Affordable Care Act / Creating Small Business Jobs Act of 2010 • New Law • Beginning for payments in 2011, rental real estate is now a trade or business for Form 1099 reporting purposes (2011 Form 1099 filed by February 2012) – IRC 6041(h) • Beginning for payments in 2012, all payments over $600 to be reported (2012 Form 1099 filed by February 2013) – IRC 6041(a) • IRS provided guidance on credit card charges/payee is credit card company not vendor • Repeal is a possibility for IRC 6041(a)

32. Other Hot Topics • ASC 820 – Fair Value Measurement • ASC 310 – Receivables • ASC 958-805 – Mergers of Non-Profits and Goodwill • ASC 740 – Accounting for Income Taxes • Increased number of IRS Examinations

33. Jeff SchraggArgy, Wiltse & Robinson, P.C.jschragg@argy.com703.770.6313 Jeff is a tax partner with Argy, Wiltse & Robinson, PC (“Argy”). Jeff counsels clients on highly-complex tax and business matters. He provides his clients a broad and deep knowledge of all areas of state, federal and international taxation. Jeff has coordinated services for both individual and business clients, including exempt • organizations, real estate companies and government contractors He brings a results-driven approach to closely-held businesses and high net-worth individuals. Jeff advises clients in all phases of growth from inception to funding growth to exit strategies via sale or going public. He has extensive mergers and acquisitions experience. As such, Jeff has brought sophisticated tax planning and advice to Fortune 500 companies, S corporations, trade associations and charities. Jeff is the Chair of Synetic Theater’s Board of Directors and a board member of the Fairfax County Chamber of Commerce. Jeff received is Juris Doctor from The National Law Center at George Washington University and a Bachelor of Arts in Economics and Management from Albion College.

34. Patty BrickettArgy, Wiltse & Robinson, P.C.pbrickett@argy.com703.752.2782 Patty Brickett, Lead Partner of Argy’s International Services Practice, has over 21 years of experience providing International Tax and human resources consulting services to multinational corporations and their global executives. Patty works with clients in all industries and in the not for profit community. Her clients range from those just beginning to expand globally, to those with mature international operations. • Patty assists clients with Tax planning and compliance using Income Tax Treaty Network to minimize exposure, International compensation delivery, International payroll management and consulting, Tax equalization/tax protection policy development, Analysis of Status of Forces Agreements (SOFA’s), Technical Cooperation Agreements and other bilateral agreements, U.S. tax withholding and reporting requirements on payments to foreign entities and individuals including assistance to companies under Audit Permanent Establishment Analysis and Review of foreign tax obligations created by Business Travelers and development of internal process and procedures to mitigate risk. • Patty is frequently asked to speak on International Tax, payroll and human resources issues. She has spoken for numerous organizations including the American Society of Payroll Management, ADP, Virginia Society of CPA’s, the Greater Washington Society of CPA’s Not-For-Profit Organization Symposium, The Canadian-American Business Association, Inside NGO’s Annual Conference; Inside NGO’s Taxation of Americans Overseas Workshop, and the DC Bar Association. Patty is a guest lecturer at the American University Masters in Tax program and she has been quoted on International Tax and human resource issues in the Washington Post, Washington Business Journal and the Journal of Financial Planning.

35. Leslie PineArgy, Wiltse & Robinson, P.C.lpine@argy.com703.770.6334 Leslie Pine, Partner in the Virginia office of Argy Wiltse & Robinson, P.C. (Argy) has over 23 years of experience providing audit and consulting services to various for profit and non-profit organizations. As a partner in Argy’s Assurance and Business Advisory Group, Leslie spends the majority of her time overseeing audits, reviews and compilations • for non-profit organizations and government contractors. Her clients range from start-up entities to those with mature significant operations. Her expertise also includes non-profit audits under OMB Circular A-133. In addition, she performs special projects and due diligence reviews for both acquired and acquiring clients, as well as various types of consulting for government contractors and non-profit organizations. Leslie is the lead in the assurance and business advisory group with regard to non-profit clients, and has spoken on several current accounting topics for not-for-profits, such as Accounting for Uncertainty in Income Taxes and alternative investments. Leslie assists clients with governmental cost principles, indirect rate structures, disclosure statements, compliance audits for government contractors and not-for-profits and technical support on auditing and accounting issues for those clients. • Leslie received both her undergraduate degree and Master’s Degree in Accountancy from the University of Nevada. She is a member of the AICPA and is licensed in Virginia, the District of Columbia, and has a Practice Privilege in California.

36. All of the materials contained in this course have been created by and belong solely to Argy, Wiltse & Robinson, P.C. IRS Circular 230 Disclosure: Tax advice contained herein is not intended or written to be used and cannot be used for the purpose of avoiding tax-related penalties that may be imposed on the taxpayer. Argy, Wiltse & Robinson, P.C. is not rendering legal advice and assumes no liability whatsoever in connection with its use.

37. Please Contact Us At Jeff Schraggjschragg@argy.com703.770.6313 Leslie Pine lpine@argy.com 703.770.6334 Patty Brickett pbrickett@argy.com 703.752.2782