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Work-In-Process: The Good, the Bad, and the Ugly

Work-In-Process: The Good, the Bad, and the Ugly. Alan M. Rosenberg, CPA Gregory B. Isaacs, CPA, PFS January 10, 2012. Biographies.

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Work-In-Process: The Good, the Bad, and the Ugly

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  1. Work-In-Process:The Good, the Bad, and the Ugly Alan M. Rosenberg, CPA Gregory B. Isaacs, CPA, PFS January 10, 2012

  2. Biographies Greg Isaacs, CPA, PFS is Partner in Charge, Consulting Services at Mountjoy Chilton Medley LLP and is a member of the firm’s executive committee. His practice focus is on transactional business services with an emphasis on mergers and acquisitions, valuation, corporate reorganization, and strategic planning. Mr. Isaacs provides assurance and tax services to companies in development stage, technology, construction, real estate, distribution, service, healthcare, retail, and restaurant industries. He is a member of a number of organizations including the AICPA, the Kentucky Society of Certified Public Accountants, and Greater Louisville Inc. Community Development/Capital Projects Committee. Alan M. Rosenberg, CPA is a partner at Mountjoy Chilton Medley LLP with close to 30 years experience in public accounting providing assurance, tax planning, and management advisory service to the construction, manufacturing, health care, and retail industries. His practice consists of construction, manufacturing and distribution, medical, and real estate development clients. Mr. Rosenberg is a member of a number of organizations including the AICPA, and the Kentucky Society of Certified Public Accountants. He serves as treasurer on the board of the Associated Builders and Contractors, Kentuckiana Chapter. 2

  3. Agenda • Contractors WIP schedule components • Determining cost to date (sounds simple!) • The judgment in estimated cost to date • Estimating track record • Internal controls over WIP • Games people play… • WIP & backlog • GAAP & tax issues • Questions/Comments

  4. Indirect overhead costs can be allocated to the project in a variety of ways: • Units of production (e.g. linear feet on a highway job) • Direct labor cost of job vs. total labor costs • Direct labor hours vs. total job hours • Combinations of direct labor and material costs

  5. How Good is the Estimate? • Building a track record of good estimates • Gain and fade analysis • Fade: more common…deferring the inevitable • Importance of good bids and pricing • Risk is generally in the labor • Historical trend…sets the bar • How can a contractor be surprised? • Sometimes a gain can be bad!

  6. Contractor Internal Controls • Importance of a good “schedule of values” and bid follow-up • Defined system for job monitoring • Regular, periodic status meetings w/ written notes and action plans • Weekly job status reports from accounting • Recognize and address issues as soon as noted • Communication is vital

  7. Contractor Internal Controls • Accounting System support • Job Cost • P.O. System • Change Order process • Focus on the “blocking and tackling” • These controls generally result in more profit/cash • Incentive plans should be aligned

  8. Contractor Internal Controls • How complete are the job files • Signed Contracts and documentation • Contract billing • Timeliness and impact on “under/over billings” • Are Owners/Generals “reducing billings”? • Proper follow-up on outstanding A/R

  9. Games People Play • “We can make this up…” • Judgment is needed but if problems exist you will need to drill down to the cause and effect. • What is the current % complete and how will it impact the Backlog and overall Estimated Profitability? • Detail tests of Job Cost build-up • What if we “accrue additional costs”?

  10. Games People Play • “It can’t be that good…” • How does the job compare with past performance? • What are the reasons for the “gain”? • Can we “save” some of this for later? • Alternatively, “It can’t be that bad…” • Accrue a loss on contract • Disclosure requirements

  11. Games People Play • “Maybe we can move that cost to another job…” • How often does this happen? • Job Cost testing procedures • What about “unused materials”? • “We have never had a ‘Loss Contract’ before” • Joint Ventures – cost vs. equity method

  12. WIP & Backlog • Importance of estimates, re-emphasized • Profitability to cover future overhead • Typical disclosures • Informational • Generally unaudited

  13. GAAP & Tax Issues • GAAP – revenue recognition is the hot topic • Percentage completion should continue • Maybe some “tweaks” regarding breaking out contract components • Any formal change still probably deferred until 2014 or 2015

  14. GAAP & Tax Issues • Lease accounting – this will impact all Businesses • Move all lease arrangements on to the Balance Sheet • “Right to Use asset” offset with a liability • Impact on bonding and banking financial covenants

  15. GAAP & Tax Issues • New Financial Reporting Model – Stay Tuned • Major change in format of current Balance Sheet and Income Statement • Emphasis on Operating, Investing and Financing activities, somewhat similar to the Statement of Cash Flow • Impact on Bonding ratios • No more “Current Ratio”

  16. GAAP & Tax Issues • Tax matters • Percentage Completion method for tax • Applies to all long-term contracts unless “Small Contractor” or Homebuilder • Most follow GAAP % Complete • Simplified Cost to Cost • Direct Labor • Direct Material (and subcontracts) • Depreciation

  17. GAAP & Tax Issues • Tax matters • Consideration of increase in “Small Contractor Exemption” • From $10M to $40M (3-yr average) • Look-back Calculation • Applies to all long-term contracts using the % complete method • May have an AMT impact for flow-through entities

  18. GAAP & Tax Issues • Tax matters - other • 3% Withholding for Government Contracts reversed • Increased 1099 reporting reversed

  19. Questions?

  20. Thank You! Alan Rosenberg alan.rosenberg@mcmcpa.com Greg Isaacs greg.isaacs@mcmcpa.com 888.587.1719 www.mcmcpa.com

  21. IRS Circular 230 Disclosure As a result of perceived abuses, the Treasury has recently promulgated Regulations for practice before the IRS. These Circular 230 regulations require all accountants to provide extensive disclosure when providing certain written tax communications to clients.  In order to comply with our obligations under these Regulations, we would like to inform you that any advice given in this presentation, including any attachments, cannot be used to avoid penalties which the IRS might impose, because we have not included all of the information required by Circular 230, nor have we performed services that rise to this level of assurance.

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