Update on Accounting Hot Topics

1. Update on Accounting Hot Topics August 31, 2011

2. Your Discussion Leaders • Nichols Cauley & Associates, LLC – Certified Public Accountants and Advisors – Atlanta, Dublin and Warner Robins • William Sammons, CPA, PFS, CIA, CFP®, Managing Partner – Atlanta Office • Ian Waller, CPA, CIA Audit Partner – Atlanta Office • David Musser, CPA, CIA, CFP® Tax Partner – Atlanta Office • Bill McDevitt, CPA Tax Manager – Atlanta Office

3. Fraud Customers Employees Vendors Officers Third Parties

4. ACFE Fraud Statistics • The typical organization loses 5% of annual revenue to fraud resulting in global losses of more than $2.9 trillion • Median loss caused by occupational fraud was $160,000 • Smaller organizations are disproportionately victimized ACFE –Association of Certified Fraud Examiners

5. Disproportioned Losses

6. More Statistics • U.S. Department of Commerce (DOC) estimates that 25% to 40% of all employees steal • DOC linked internal theft as the primary contributor of one out of five business failures • 10-10-80 rule: 10% of people will never steal, another 10% will steal at any opportunity, and 80% can go either way

7. Recessionary Fraud • National White Collar Crime Center noticed a spike in arrests for fraud during recessions • Following the savings and loan crisis in 1990, white-collar fraud arrests increased 52% • Following the Internet bust in 2000, arrests jumped 25% • ACFE polled 500 Certified Fraud Examiners and reported 55% saw an increase in fraud cases during the previous 12 months

8. Fraud Detection • Fraud sustained for a median of 18 months before detection

9. Current Economic Conditions and Technology - Influence on Fraud • In uncertain economic times, companies are forced to do more with less – opportunity • As conditions worsen, employees and companies rationalize benefits of cheating • Fraud is more likely to occur when employees and companies are feeling outside financial pressures • Making the current economic conditions a proverbial “Fraud Fertilizer” • EFT Fraud – Becoming more and more common – hijacker obtains access to Company computer through some apparent “legitimate” means.

10. Technology – EFT Fraud • Attack is not centered on the Bank but is most often centered on the Company’s computer which would initiate the transaction. • EFT Fraud basically has 3 steps: • Hijacker illicitly acquired the login credentials. • Covertly gains access to the victim’s computer to avoid the Bank’s security features which is activated when the Bank’s system does not recognize the electronic fingerprint. • Transfer the Company’s funds to the hijackers account. • EFT Fraud – Typically must be reported within a few hours of the transaction or victims funds may be lost.

11. Occupational Fraud and Abuse • Occupational Fraud is defined as the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the organization's resources or assets • Occurs when an employee commits fraud against his/her employer • Usually consists of corruption, misappropriation of assets, and financial statement fraud

12. Occupational Fraud vs. Economic Conditions • As more and more financial pressures build on individuals and companies, the more susceptible to fraud an organization becomes • Strong internal controls must be implemented and maintained even through reductions of workforce • It is imperative that leaders within the company and organization set a positive “Tone at the Top” and establish strong company values • Awareness/Education of employees is imperative

13. How to Maintain Strong Internal Controls in Today’s Understaffed Workplace • Assess the risks which may exist in the functionality of your company • Address the risks through appropriate implementation of control procedures • Continuously MONITOR the effectiveness of controls • Allow for effective communications of controls and risks for all levels of the organization • Always modify or update your control structure to maintain the efficiency and effectiveness as it pertains to the evolving risks of your industry • Risk is ever present and always changing

14. Internal Controls

15. Internal Controls • What should companies think about regarding internal controls? • As you undertake new opportunities, you will always face a level of risk. As you know, without risk, there is no reward. • Carefully designed internal controls can provide a means to minimize and mitigate the risks these new opportunities bring to your company.

16. Designing Internal Controls • The process of identifying and implementing these controls should be incorporated in your risk assessment procedures • The process will also serve to further your knowledge and understanding of the business and its related risks • These internal controls should be carefully designed and communicated to all levels of the organization (part of the education/awareness program) • Controls are only effective if everyone in the company follows them

17. Designing Internal Controls • To ensure everyone is on board, lead by example and set a tone at the top that highlights the importance of the controls • Tie in the big picture by aligning it with and relating it to the company’s strategic vision • Implementing, following, and reviewing an effective set of internal controls today will position your company to capitalize on the unique opportunities presented to you during this economic season of growth

18. Methods of Detecting Fraud • Small businesses are particularly vulnerable to fraud due to limited staff and resources • While effective internal controls are a great deterrent to fraud, it will likely not prevent all frauds • Either from occurring or detecting once the fraud has taken place • Two major reoccurring red flags for fraudsters is • Financial difficulties/ vices • Expectations/ pressures

19. Additional Methods of Detecting Fraud in the Workplace • While strong internal controls and positive leadership provide the most effective ways of deterring fraud, other methods have also proven useful • Anonymous tips are an effective weapon in preventing and detecting fraud • Respondents to the ACFE survey were asked to identify how the frauds were first discovered. Nearly half of the cases in the 2010 study were uncovered by a tip or complaint from an employee, customer, vendor, or other source • Effective communication discussed in the previous slide is only useful if a channel exists which allows individuals to communicate • Hotlines and employee support programs

20. Initial Detection of Occupational Frauds* * The sum of percentages in this chart exceeds 100% because in some cases respondents identified more than one detection method.

22. Criminal History of Perpetrator

23. Conclusion of Fraud • Establish the tone at the top and communicate • Economic pressures and reduced workforce increases the risk of fraud • Implement solid internal control and monitor • Look for alternative means of effective communication of fraudulent activity (i.e. hotlines or employee support program)

24. Conclusion of Fraud • Organizations tend to over-rely on external and internal audits for fraud detection • Fraud detection occurs more from controls developed internally • Employee education/awareness is the foundation of preventing and detecting occupational fraud • Surprise audits are an effective, yet underutilized, tool in the fight against fraud • The threat of surprise audits increases employees’ perception that fraud will be detected and thus has a strong deterrent effect on potential fraudsters

25. Accounting for Leases Proposed Amendments and Updates

26. Lease Accounting Rules • Previous lease standards have been criticized for failing to meet the needs of financial statement users • Omit relevant information about rights and obligations that meet the definitions of assets and liabilities • FASB and the IASB initiated a joint project to develop a new approach to lease accounting that would ensure that assets and liabilities arising under leases are recognized • This is a byproduct of the AICPA/IASB Convergence Project

27. FASB and IASB Response • New standard would effectively eliminate all operating leases and require leases to be capitalized on the company's balance sheet • More extensive financial statement disclosures • The new approach ensures assets and liabilities arising under leases are recognized in the financial statements • No grandfathering – leases in effect at date of implementation will need to be reflected.

28. New Recognition Standards • Lessee Accounting • Initially recognize a liability to make lease payments “obligation to pay rentals” and a “right-of-use” asset which will both be measured at the present value of the lease payments plus initial direct transactions costs (excluding operating expenses such as property taxes). • Subsequently measure the liability to make lease payments using the effective interest method. • Amortize the right-of-use asset on a systematic basis that reflects the pattern of consumption of the expected future economic benefits. • Lease term is the longest possible lease term.

29. New Recognition Standards • Lessor • Two methods of accounting • Performance Obligation Approach • Used when significant risks or benefits associated with the underlying asset are retained by the lessor • Derecognition Approach • Used when significant risk or exposure are not retained by the lessor

30. New Disclosure Requirements • Lessee • Identify and explain the amounts recognized in the financial statements arising from leases • Describes how leases may affect the amount, timing, and uncertainty of the entity's future cash flows • Including the nature of the lease agreement • Information about the principal terms of any significant lease which has not commenced

31. New Disclosure Requirements • Lessor • Information about exposure to risks or benefits associated with the underlying asset • Information related to the decision to treat the lease using the performance obligation approach or the derecognition approach • Information related to impairment losses

32. New Disclosure Requirements • Lessor • A rollforward of the opening and closing balances for • Rights to receive lease payments • Lease liabilities arising from leases to which it applies the performance obligation approach • Residual assets arising from leases to which it applies the derecognition approach • Information about the nature and amount of each class of residual asset arising from leases to which it applies the derecognition approach • Information about the nature of significant service obligations related to its leases

33. Update to Proposed Amendment • July 2011, IASB and FASB agreed unanimously to re-expose revised leasing proposal (May delay issuance of new lease standards until well into next year). Effective date is projected not to be earlier than 2013. • Re-exposing will provide interested parties with an opportunity to comment on revisions • The boards reaffirmed the major change to lease accounting, which is to report lease obligations and the related right-to-use on the balance sheet

34. Update to Proposed Amendment • At the July 2011 meeting, the boards discussed and tentatively decided lessee presentation and disclosure requirements • Apply a single accounting approach for all leases • Further, the boards tentatively decided lessors should apply a “receivable and residual” accounting approach • Excluding leases of investment property measured at fair value and short-term leases • Continue to recognize and depreciate asset • Recognize lease income over the lease term

35. Conclusion of Lease Accounting • No more operating or capital leases • Lessor must determine whether the lease will be recognized under the performance obligation method or derecognition method • Leased assets/obligations are broken out separately for reporting purposes with enhanced disclosures

36. Lease Accounting – Things to Consider • Deferred Tax Consequences • Property Tax Issues • Administration of Leases and Controls over leases – What will be the cost? • Ability to meet Loan Covenants – there will be changes in earnings presentation as well as cash flows. • ??????

37. Health Care Reform 2010 What it means for you, your business, and your clients

38. Introduction • Health Care Reform is made up of two new laws: • Health Care and Education Affordability Reconciliation Act of 2010 • Patient Protection and Affordable Care Act (PPA) Collectively referred to as the Affordable Care Act (ACA) • The Budget Office estimates the Acts will ultimately provide coverage to 32 million uninsured people but still leave 23 million uninsured (1/3 mostly illegal immigrants) in 2019 • Most sweeping legislation on Health Care since 1965 with the Creation of the Medicare and Medicaid Programs • Magnitude of Acts also compared to the Social Security Act of 1935 and the Civil Rights Act of 1964

39. Introduction • While this presentation focuses primarily on new taxes, fees and reporting requirements, it is less well known how the ACA changes the medical delivery system • Both payment and delivery methods are subject to sweeping changes • Steps towards eliminating fee-for-service to paying for health care services based on quality and cost targets • New emphasis on preventing acute conditions and management of chronic diseases • Focus on securing more primary care physicians • Contribution to the creation and diffusion of health insurance technology

40. Key Terms and Definitions • High Income Taxpayers • Individual and Head of Household Filers - >$200,000 earned income • Married Couples Filing Jointly Filers- >$250,000 earned income • Married Couples Filing Separate Filers- >$125,000 earned income • Investment Income – interest, dividends, royalties, rents, gains from disposing of property from a passive activity and income earned from an activity classified as passive. • Investment income does not include distributions from qualified retirement plans

41. Key Terms and Definitions • Qualified Small Employer – one with no more than 25 employees and average annual wages of no more than $50,000. • “Large” Employers – generally one with more than 50 full-time employees • High Cost “Cadillac:” Insurance (inflation adjusted) – • Individuals - >$10,200 • Families - $27,500 • Higher thresholds apply for non-Medicare retirees age 55 or older and certain high risk professions • Excise Tax – additional tax which is generally specific in percentage. In the health care context it is non-deductible. The tax is often passed on to consumers in the form of higher premiums or cost-cutting • Market Sector Fees – fees which will be assessed and allocated to pharmaceutical manufacturers, importers and health insurance providers. The assessed fee is non-deductible

42. Key Terms and Definitions • Excise Tax – additional tax which is generally specific in percentage. In the health care context it is non-deductible. The tax is often passed on to consumers in the form of higher premiums or costs • Market Sector Fees will be assessed and allocated to pharmaceutical manufacturers, importers and health insurance providers. The assessed fee is non-deductible • Adult Dependent – ages change basically to age 26 or 27 (depends on the employer elections). Effective based on plan years beginning on or after October 1, 2010 • Grandfathered Health Care Plan – Individual Plans or Group Health Plans that existed on March 23, 2010. HHS and IRS amended to lift restrictions against entering a into a new insurance policy

43. How it Affects You: • Individuals • All individuals will be required to maintain health insurance or pay a tax/penalty • Medicare tax on investment income for high-income individuals and families • Itemized deductions for medical expenses subject to an increased floor • Unmarried dependents may stay on a parents plan through the age of 25 (or through age 26 if selected by the employer)

44. How it Affects You: • The “Individual Mandate” • A new tax/penalty imposed on individuals who have not obtained health care coverage by 2014 • Phase-in over three years • Greater of $95 or 1% of income in 2014, increases to • Greater of $695 or 2.5% of gross income in 2016 • Note this monthly penalty is 1/12 of the penalty and is calculated per individual. Therefore if you do not have coverage during the year you would calculate the penalty on a monthly basis.

45. How it Affects You: • New Medicare Taxes • Beginning in 2013 a 3.8% Medicare tax will be assessed on the lesser of: • Unearned income, or • Amount by which “modified” AGI exceeds either the $200,000 or $250,000 threshold amount Unearned income is defined as interest, dividends, capital gains, annuities, rents, and royalties. The Medicare tax provisions is estimated to generate additional governmental revenues of $210 billion from 2013 – 2019. Note neither the $200,000 nor the $250,000 thresholds are indexed for inflation.

46. How it Affects Businesses : • Large employers will be required to provide employees with health insurance benefits or be subject to a nondeductible fee – “Pay or Play” • High cost, “Cadillac”, health care plans will be assessed an excise tax. • Small employers may be eligible for a new tax credit • If your health plan offers dependent coverage, it must offer this coverage to unmarried dependents through the age of 25 (or the plan can opt to extend coverage to those through the age of 26) • Free Choice Vouchers

47. How it Affects Businesses : • “Large” Employers • Non-deductible fee if firm fails to offer adequate coverage – “Pay or Play” – Effective 2014 • Fee is computed as: • $2,000 x (Number of employees – 30) • “Large” employers are defined as having the equivalent of 50 or more full-time employees.

48. How it Affects Businesses : • “Cadillac” Plans • A new 40% excise tax will be assessed on high-cost health plans provided to employees by employers starting in 2018 • The tax is applied to the amount of the plan that exceeds $10,200 for individuals • Annual thresholds will increase by $1,650 for retired individuals over 55 years old and for certain high-risk professions • The tax is applied to the amount of the plan that exceeds $27,500 for families • Annual threshold premiums will increase by $3,450 for retired individuals over 55 years old and for certain high-risk professions • Further adjustments will be based on CBO projections and cost of living adjustments after 2018

49. How it Affects Businesses : • “Cadillac” Plans • Applies to: • Employer-provided group health premiums where benefits are not taxable to the employee, and • Self-employed plans which qualify for a deduction. • Insurer is responsible for payment of the tax. • For self-insured plans, the employer or plan administrator is responsible. • Employers will be responsible for calculating the value of excess premiums and filing an information return to the IRS and Insurer or plan administrator.

50. How it Affects Businesses : • “Cadillac” Plans • Does NOT include: • Dental, vision, and long-term care plans • Penalties will be assessed for failure to properly report excess premium amounts • Non-deductible expense