CPA REPORT SUBSCRIBER GUIDE PDF Free Download

Name: CPA REPORT SUBSCRIBER GUIDE PDF
Author: dr_jacqueline

1 / 141

0 views•141 pages

CPA REPORT SUBSCRIBER GUIDE PDF Free Download

CPA REPORT SUBSCRIBER GUIDE PDF free Download. Think more deeply and widely.

Field of Study: Accounting

In the era of a global crisis due to COVID-19, many economists expect 2020 to

be the year when we will experience the worst recession since the Great

Depression. Many industries, such as oil and gas, retail and manufacturing,

hospitality, portions of the transportation sector, tourism, manufacturing, aerospace

and many others have reported goodwill impairment in the first two quarters of

2020 and more impairments are likely to spike before the end of the year. The

negative economic impact of the virus is certainly considered a triggering event

and justifies an impairment test on long-lived assets or asset groups for most

industries. Todd Rahn, senior managing director and lead of accounting advisory

practice on the west coast and Chris Brown, senior managing director, from FTI

Consulting, discuss industries that are at the greatest risk for impairment.

Field of Study: Accounting

COVID-19 imposed certain pressures on C-suite executives and has created an

environment that is ripe for fraudulent activity. Pressure is one of the three legs

in the fraud triangle model that can lead someone to commit fraud, along with

perceived opportunity and rationalization. It’s easy to talk in general terms about

pressure, opportunity and rationalization, but how does each one surface in day-

to-day operations, especially during the pandemic? Todd Rahn, senior managing

director and lead of accounting advisory practice on the west coast and

Chris Brown, senior managing director, from FTI Consulting, continue our

segment discussing related pressures, incentives and opportunities to commit

financial reporting fraud that should be considered in an entity's risk assessment

from a corporate perspective.

Field of Study: Taxes

On August 8, 2020, the White House issued a “Memorandum on Deferring

Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster” allowing

deferral of the withholding, deposit, and payment of the tax on wages or

compensation paid during the period of September 1, 2020 through December 31,

2020. Barbara Weltman, president of Big Ideas for Small Business is giving us

some of the highlights of the presidential deferral pronouncement, as well as the

IRS developments on payroll-related matters.

Field of Study: Accounting

Environmental, social and governance (ESG) criteria may not be a new set of

standards but it is gaining more and more ground amongst private equity

companies and investors as it helps screen potential investments. Modern investors

reevaluate and challenge traditional investment approaches as the global

environment evolves and becomes more complex. ESG criteria assess a company’s

values and behaviors and help investors see if these values match their own.

Anthony DeCandido, financial services partner and senior financial services analyst

for RSM US LLP, discusses the ESG criteria in further detail and its objectives.

OCT. ‘20

summary summary summary summary

COVID-19: Are

Your Financial

Statements

Infected? –

Part I

COVID-19: Are

Your Financial

Statements

Infected? –

Part II

Deferral of

Payroll Tax

Obligations and

Data Validation

& Reporting

Excellence –

The Future of

Corporate

Responsibility

CPA REPORT SUBSCRIBER GUIDE

OCTOBER 2020

Summary Page i [p. 1]

CPE Requirements iii [pp. 3–5]

Segment One 1–1 [pp. 7–38]

Segment Two 2–1 [pp. 39–69]

Segment Three 3–1 [pp. 71–100]

Segment Four 4–1 [pp. 101–132]

Evaluation Form A–1 [pp. 133–134]

Index B–1 [pp. 135–139]

Group Live Attendance Form C–1 [p.141]

68]

CPA Report is a product of www.kaplanfinancial.com

Information regarding COVID-19 changes rapidly; further updates will be in upcoming segments.

CPAR/OCT. ‘20

iii

cpe requirements and group live

CPE Requirements and Group Live

1. Select discussion leaders who have the

appropriate education and/or

experience both to teach the segment

subject and conduct the subsequent

group discussion.

2. Have each discussion leader review

the video segment and the written

materials in the Subscriber Guide prior

to the presentation of the segment.

3. Make sure that each discussion leader

certifies the attendance at his/her

discussion group by signing and dating

the Group Live Attendance Form.

4. (Individuals) View the video segment

(30 to 35 minutes).

5. (Individuals) Discuss the segment

materials as they relate to his/her own

work and/or organization (20 to 25

minutes).

6. (Individuals) Evaluate the instructor

using the criteria listed on the

Evaluation Form.

7. Check with your State Board of

Accountancy for specific details,

including group live sponsorship

registration requirements.

Group Live Format

When taking a CPA Report segment on a group live basis, individuals earn CPE credits when

they (or their organization) do the following:

CPE Requirements

When properly administered, the CPA Report educational program meets the

requirements for group live and self-study participation as defined in the Statement for

Standards in CPE Reporting.

Please note:

lYou cannot earn additional credits by taking the same course in group live format

and online self-study format.

lCPE requirements vary from state to state. State boards of accountancy have final

authority on the acceptance of individual courses for CPE credit. CPAs should

contact their state board regarding specific CPE requirements.

cpe requirements and group live

The following information will help you plan and implement the CPA Report program within

your firm:

How to Implement the CPA Report

1. Each quarter, you may receive by

email a CPA Report Summary Page

in advance of the video segment

notifying you of the upcoming

Continuing Professional Education

topics that will be covered.

2. The CPAR DVD is expected to

arrive the month following the end

of the quarter. If you do not have a

standard day and time each quarter

designated as CPE day, issue a

memo with the date of your

upcoming seminar. (If attendance is

not required, please provide plenty

of advance notice for optimum

participation).

3. Select the topic(s) you wish to cover

in your session when the CPAR

Summary Page or the actual

program arrives.

4. It is best for an organization to have

its CPE classes on a regular and

consistent basis, so it is easy for the

staff to remember when scheduling

clients.

5. You may wish to provide each

group live attendee a “Certificate of

Completion” noting the hours

earned and the topic areas.

6. Always check with your State

Board of Accountancy for specific

details, including group live

sponsorship registration

requirements.

If you need more information or have any questions, please contact Customer Service

at CPESupport@kaplan.com or 914-517-1177.

Note: CPE requirements vary from state to state. State boards of accountancy

have final authority on the acceptance of individual courses for CPE credit. CPAs

should contact their state board regarding specific CPE requirements.

CPAR/OCT. ‘20

CPA Report Update

online self-study online self-study

Please note: This issue of CPA Report Online Self-Study is scheduled to go live

online on October 30, 2020.

If you need more information or have any questions, please contact Customer

Service at CPESupport@kaplan.com or 914-517-1177.

Online Self-Study

Kaplan Financial Education is registered with the National Association of State Boards of

Accountancy (NASBA) as a sponsor of continuing professional education on the National

Registry of CPE Sponsors. State boards of accountancy have final authority on the

acceptance of individual courses for CPE credit. Complaints regarding registered sponsors

may be submitted to the National Registry of CPE Sponsors through its website:

www.nasbaregistry.org.

Self-Study Format

Participants can gain self-study credit by enrolling in the CPA Report Online Self-Study

library of courses. All components of the program will be hosted online, including the

video, interactive review questions, required reading, and final exam.

In order to ensure adherence to NASBA guidelines regarding self-study, the CPA Report

and CPA Report Government/Not-for-Profit Self-Study Professional Education Centers are

no longer available. Customers should contact their company administrators for

information on taking course exams and receiving CPE credit for the courses.

Customers may contact Kaplan Financial Education at cpesupport@kaplan.com to obtain

certificates previously earned through the CPA Report Self-Study and CPA Report

Government/Not-for-Profit Self-Study Professional Education Centers.

Customers interested in the self-study format of the CPA Report can find information on

Kaplan Financial Education's self-study libraries at Online Accounting CPE Courses.

segment one segment one segment one

Segment 1

CPAR/OCT. ‘20

1–1

segment one segment one segment one

COVID-19: Are Your Financial Statements

Infected? – Part I

Learning

Objectives:

Segment

Overview:

Field of Study:

Recommended

Accreditation:

Reading

(Optional for

Group Study):

Running Time:

Video

Transcript:

Course Level:

Course

Prerequisites:

Advance

Preparation:

Expiration Date:

Accounting

December 12, 2021

Work experience in financial reporting or accounting, or an

introductory course in accounting.

None

1 hour group live

2 hours self-study online

Update

“COVID-19 Impacts on Accounting, Disclosures & Internal

Controls”

FTI Consulting

See page 1–13.

See page 1–20.

34 minutes

In the era of a global crisis due to COVID-19, many economists

expect 2020 to be the year when we will experience the worst

recession since the Great Depression. Many industries, such as oil

and gas, retail and manufacturing, hospitality, portions of the

transportation sector, tourism, manufacturing, aerospace and many

others have reported goodwill impairment in the first two quarters

of 2020 and more impairments are likely to spike before the end of

the year. The negative economic impact of the virus is certainly

considered a triggering event and justifies an impairment test on

long-lived assets or asset groups for most industries. Todd Rahn,

senior managing director and lead of accounting advisory practice

on the west coast and Chris Brown, senior managing director, from

FTI Consulting, discuss industries that are at the greatest risk for

impairment.

Upon successful completion of this segment, you should be able to:

lIdentify the treatment of lease accounting under Topic 842,

lDetermine what companies should focus on to determine if

impairment is needed,

lIdentify indicators that companies should be mindful of, and

lRecognize reporting units during restructuring.

1–21–2

outline outline outline outline outline

Outline

I. Impairments in the Area of COVID

A. Impact of Real Estate on Other

Industries

i. Lack of investments in new office

space

lWide swath of impact in the

construction industry

ii. Unmet lease obligations or lack of

rental income

lAllow banks to make massive

loan loss provisions under CECL

B. Loan Modifications Treatment Under the

Current Rules

i. Take an immediate loss for the entire

expected life of the lease

C. Topic 842 – Leases

i. The new standard makes it easier to

lConsider lease modifications

lExtensions and changes in terms

II. Real Estate and Credit Loss Modifications

A. Types of Triggering Events

i. Negative cash flows from operations

ii. Loss of key customers

iii. Unanticipated competition

iv. Economic downturn

B. ASU 2017-02 Simplification Rules

i. Allows goodwill to be amortized

ii. Simplifies impairment testing

C. Treatment After a Test of Recoverability

i. If carrying amount of asset or asset

group exceeds undiscounted future

cash flows:

lMeasure the impairment

lImpairment loss needs to be

recognized

D. Impairment in Technology & Life

Science

i. May not be benefiting

lDue to increased number of

intangible assets

CPAR/OCT. ‘20

1–31–3

outline outline outline outline outline

Outline (continued)

A. Litigations – Great Recession Versus

COVID-19

i. Great Depression

lFinancial services industry was

mostly impacted

lSEC increased scrutiny of

reporting unit determinations &

timing of impairments

lIncreased SEC comment letter

inquiring into goodwill

impairment matters &

enforcement actions

ii. COVID-19

lThe industry range is much

broader

lSEC focused on timing,

disclosures and indicators of

early warning signs

lIncrease in SEC comment letters

inquiries into goodwill

impairment matters &

enforcement actions are

expected

B. Fall of 2019

i. Economic growth

ii. Stock market was up

iii. M&A market was very high

C. The Current Environment

i. Certain industries and sectors are

gone overnight

ii. Drives exposure to potential

impairment charges

lRestructuring

lGoing concern

iii. SEC expectation for companies to

be transparent

III.Litigation Trends

A. FASB – Two-Step Test

i. Determine if there is a decline in

fair value

ii. Allocate that fair value against the

balance sheet

B. What Companies Should Focus On

i. Have a clear understanding of what

reporting units are within their

business

ii. Identify indicators that may lead to

impairment

iii. Look at impairment of other assets,

not only goodwill

C. FASB & SEC Focus

i. Trying to prevent companies hiding

an impairment problem of a

particular portion of the business

lThrough the profitability of

another portion of the business

D. Treatment Under the Current Standard

i. Once there is a decline in value

below the book value

lBook that against goodwill until

the goodwill has disappeared

E. Indicators to be Mindful of

i. Sales are down

lDrop in the number of

customers

ii. Website traffic

iii. Employment movements

lDrop in gross profit

lDrop in revenue

F. You Have Indicators – Now What?

i. Indicators will present certain

situations

ii. Drive conversations

iii. More likely than not will lead to

impairment

IV. Assessing Goodwill Impairment

1–4

outline outline outline outline outline

Outline (continued)

V. Considerations for Reporting Units

A. Identifying the Right Reporting Units

i. Portion of the business owned by

somebody within the organization

ii. Are there financial results of the

reporting unit they are responsible

for?

iii. Economic characteristics

iv. Use trend analysis and results over

time to ensure

lFairness

lObjectivity

lUse of appropriate judgment

B. Reporting Units & Restructuring

i. Reallocate goodwill

ii. Document basis and determination

of the approach

iii. Ensure you are not hiding goodwill

impairment

lOr taking a higher goodwill

impairment than needed

iv. Be consistent

VI. Forecasts in a Time of Uncertainty

A. Dealing with the Unknown

i. Set short-term goals & expectations

ii. Prepare short-term forecast or

projections to understand better

lCompany’s liquidity

lIf they can continue to stay in

business

lIf they need to close their doors

iii. Align current results with

expectations

iv. Adjust if necessary

v. Disclose what was done and

continue to assess

B. Hockey Stick Approach

i. Where a forecast starts with

certainty and as it goes out there is

less and less certainty

C. Valuation Risks While Preparing

Projections

i. Ensure that:

lThere is documentation support

of all assumptions used

lUnsupported assumptions are

investigated by the SEC

lAnd enforcement action has been

taken

ii. Uncertainty can impact the way you

pick probabilities and could have

weighted cash flows

iii. Discount rate is taken into a place

of risk premium to account for the

uncertainty

D. IFRS vs GAAP

i. Under U.S. GAAP

lRecoverability test

lApplicable to amortized

intangible assets

ii. Under IFRS

lEvaluation of fair value against

book value if there are indicators

of impairment

CPAR/OCT. ‘20

1–5

outline outline outline outline outline

A. Highlights on SEC’s Perspective on

Goodwill

i. Exposing preexisting accounting

or disclosure improprieties

ii. Opportunity for issuers to engage

in improper conduct

lManipulation of valuations

lTaking a bath to avoid hanging

on of reporting that is not doing

well

lContinuing to hide things

lDeferring in the hopes of

recovery

iii. Looking at disclosures around

changes of

lInternal controls over financial

reporting

lMaterial changes

B. SEC’s Statements to Filers

i. Sympathetic to personal

circumstances putting pressure on

internal controls, but due to those

circumstances people need

information timely

C. Todd Rahn’s Views

i. Be open with what is driving the

change in the business

ii. Make those drivers clear to

analysts and stakeholders

iii. Don’t go too far disclosing

information that doesn’t need to be

disclosed

iv. Be transparent about challenges or

things that are coming up that will

drive change in the business

“So they key is that internal

controls … need to be functioning

and treated as a priority, both

within the company, and clearly it

obviously already is, but within

our regulatory regime.”

— Todd Rahn

VII. Working with the SEC Perspective

Outline (continued)

1–6

Discussion Questions

1–6

1. COVID-19: Are Your Financial Statements Infected? –

Part I

lAs the Discussion Leader, you should

introduce this video segment with

words similar to the following:

“In this segment, Todd Rahn and Chris

Brown discuss industries that are at

the greatest risk for impairment

triggered by the COVID-19

pandemic.”

lShow Segment 1. The transcript of

this video starts on page 1–20 of this

guide.

lAfter playing the video, use the

questions provided or ones you have

developed to generate discussion.

The answers to our discussion

questions are on pages 1–8 to 1–10.

Additional objective questions are on

pages 1–11 and 1–12.

lAfter the discussion, complete the

evaluation form on page A–1.

1. As a result of the COVID-19 pandemic,

many industries and companies have

already and are expected to continue

reporting impaired goodwill on their

balance sheets. What are the accounting

rules regarding goodwill testing? How

have the recent events impacted your

company’s recorded goodwill, if at all?

2. Among the many industries to be

impacted by the COVID-19 is the

commercial real estate industry. What

have been the effects of the pandemic

on this industry? What has been the

impact to you, your role and your

organization?

3. A common effect of many economic

downturns is asset impairment related

litigation. What are the lessons learned

from impairment related litigation and

enforcement actions that occurred in the

last recession and more recently from

the COVID-19 pandemic? Has your

organization had any experience in

litigation related to asset impairments?

4. U.S. GAAP requires good will to be

tested for impairment. What are the

steps and factors companies should

consider when testing for impairment?

How does your organization test for

impairment?

You may want to assign these discussion questions to individual participants before viewing

the video segment.

Instructions for Segment

Group Live Option

discussion questions discussion questions

For additional information concerning CPE requirements, see page vi of this guide.

1–61–6

1–6

CPAR/OCT. ‘20

1–7

Discussion Questions (continued)

discussion questions discussion questions

5. When it comes the issue of testing with

specific reporting units of a company,

there are certain factors companies

should consider. What are some of the

factors companies should evaluate at the

reporting unit level? What factors does

your organization consider?

6. During the pandemic, many companies

faced challenges creating forecasts and

projections. What are some of the issues

and risks executives face when

preparing future forecasts and

valuations? How has your organization's

ability to prepare forecasts been

affected?

7. Companies should also make it a point

to make sure they understand the SEC’s

views on the treatment of goodwill in

the current environment. How can

companies comply with the SEC’s early

warning disclosure requirements?

1–8

suggested answers to discussion questions

1. As a result of the COVID-19 pandemic,

many industries and companies have

already and are expected to continue

reporting impaired goodwill on their

balance sheets. What are the accounting

rules regarding goodwill testing? How

have the recent events impacted your

company’s recorded goodwill, if at all?

lUnder U.S. GAAP, private companies

that don’t elect to amortize goodwill

and all public companies must test for

impairment at least annually or, more

often, when “triggering events” occur

lTypes of Triggering Events

vNegative cash flows from

operations

vLoss of key customers

vUnanticipated competition

vEconomic downturns (e.g.,

pandemics)

lAccounting Standards Update (ASU)

2017-04, Intangibles – Goodwill and

Other (Topic 350): Simplifying the

Test for Goodwill Impairment

vBecame effective January 1, 2020

for calendar year end public

companies

vSimplifies the accounting for

goodwill in periods subsequent to

initial recognition by:

kAllowing goodwill to be

amortized

kSimplifying impairment testing

vMay be applied to existing

goodwill as well as goodwill

arising from future business

combinations

lProperty, plant and equipment and

other intangible assets are also

required to be tested for impairment

vAssets are considered impaired and

an impairment must be recognized

when the book value, or net

carrying value, exceeds expected

future cash flows

lParticipant response based on

personal/organizational experience

2. Among the many industries to be

impacted by the COVID-19 is the

commercial real estate industry. What

have been the effects of the pandemic on

this industry? What has been the impact

to you, your role and your organization?

lResidential real estate

vHousing prices in the suburbs have

increased as people seek to move

outside of cities and suburban

locations

lCommercial real estate

vLack of investments by companies

and government agencies in new

office space will create excess

inventory and also impact other

industries (e.g., construction)

vUnmet lease obligations by

commercial tenants or lack of

rental income

kRequires banks to make loan

loss provisions under Current

Expected Credit Losses (CECL)

model

lLease modifications may be expected

in the future which will require

companies to take an immediate loss

for the entire expected life of the lease

lASC Topic 842 – Leases makes it

easier for public companies to

consider:

vLease modifications

vExtensions and changes in terms

lParticipant response based on

personal/organizational experience

Suggested Answers to Discussion Questions

1. COVID-19: Are Your Financial Statements Infected? –

Part I

CPAR/OCT. ‘20

1–9

suggested answers to discussion questions

3. A common effect of many economic

downturns is asset impairment related

litigation. What are the lessons learned

from impairment related litigation and

enforcement actions that occurred in the

last recession and more recently from the

COVID-19 pandemic? Has your

organization had any experience in

litigation related to asset impairments?

lGreat Depression

vFinancial services industry was

mostly impacted

vSEC increased scrutiny of

reporting unit determinations &

timing of impairments

vIncreased SEC comment letter

inquiring into goodwill

impairment matters &

enforcement actions

lCOVID-19

vThe industry range is much

broader

vSEC more focused on timing,

disclosures and indicators of early

warning signs

vIncrease in SEC comment letters

inquiries into goodwill impairment

matters & enforcement actions are

expected

lParticipant response based on

personal/organizational experience

4. U.S. GAAP requires goodwill to be

tested for impairment. What are the steps

and factors companies should consider

when testing for impairment? How does

your organization test for impairment?

lFASB – Two-Step Test

vDetermine if there is a decline in

fair value

vAllocate that fair value against the

balance sheet

lCompanies should:

vEnsure they have a clear

understanding of what reporting

units are within their business

vIdentify indicators that may lead

to impairment

vLook at impairment of other assets

lParticipant response based on

personal/organizational experience

5. When it comes to the issue of testing

with specific reporting units of a

company, there are certain factors

companies should consider. What are

some of the factors companies should

evaluate at the reporting unit level? What

factors does your organization consider?

lIdentifying the Right Reporting Units

vPortion of the business owned by

somebody within the organization

vAre there financial results of the

reporting unit they are responsible

for?

vEconomic characteristics

vUse trend analysis and results over

time to ensure

kFairness

kObjectivity

kUse of appropriate judgment

lReporting Units & Restructuring

vReallocate goodwill

vDocument the basis and

determination of the approach

vEnsure you are not hiding

goodwill impairment or taking a

higher goodwill impairment than

needed

vConsistency is key

lParticipant response based on

personal/organizational experience

Suggested Answers to Discussion Questions (continued)

1–10

suggested answers to discussion questions

6. During the pandemic, many companies

faced challenges creating forecasts and

projections. What are some of the issues

and risks executives face when preparing

future forecasts and valuations? How has

your organization's ability to prepare

forecasts been affected?

lWhen it comes to forecasting and

valuations executives should:

vSet short-term goals &

expectations

vPrepare short-term forecast or

projections to understand better

kCompany’s liquidity

kIf they can continue to stay in

business

kIf they need to close their doors

vAlign current results with

expectations

vAdjust if necessary

vDisclose what was done and

continue to assess

lValuation Risks While Preparing

Projections

vEnsure that:

kThere is documentation support

of all assumptions used

kUnsupported assumptions are

investigated by the SEC and

enforcement action has been

taken

vUncertainty can impact the way

you pick probabilities and could

have weighted cash flows

vDiscount rate is taken into a place

of risk premium to account for the

uncertainty

lParticipant response based on

personal/organizational experience

7. Companies should also make it a point to

make sure they understand the SEC’s

views on the treatment of good will in

the current environment. How can

companies comply with the SEC’s early

warning disclosure requirements?

lSEC’s Perspective on Goodwill

vExposing preexisting accounting

or disclosure improprieties

vOpportunity for issuers to engage

in improper conduct

kManipulation of valuations

kTaking a bath to avoid hanging

on of reporting that is not

doing well

kContinuing to hide things

kDeferring in the hopes of

recovery

vLooking at disclosures around

changes of

kInternal controls over financial

reporting

kMaterial changes

vSEC has stated that it is

sympathetic to personal

circumstances putting pressure on

internal controls, but due to those

circumstances people need

information timely

lPer Todd Rahn companies should:

vBe open with what is driving the

change in the business

vMake those drivers clear to

analysts and stakeholders

vDon’t go too far disclosing

information that doesn’t need to be

disclosed

vBe transparent about challenges or

things that are coming up that will

drive change in the business

lParticipant response based on

personal/organizational experience

Suggested Answers to Discussion Questions (continued)

CPAR/OCT. ‘20

1–11

objective questions objective questions

1. Under current U.S. GAAP, __________

must test for impairment at least

annually.

a) all public companies

b) all private companies

c) only private companies that elect to

amortize goodwill

d) only public companies that elect to

amortize goodwill

2. ASU 2017-04 Intangibles – Goodwill

and Other (Topic 350):

a) only allows for amortization of

goodwill existing as of the effective

date of the ASU

b) only allows for amortization of

goodwill arising from business

combinations arising after the

effective date of the ASU

c) allows for any goodwill on the

balance sheet to be amortized

d) has more complicated impairment

testing provisions than previous

standards

3. Current guidance governing accounting

for leases:

a) does not consider the accounting

treatment of lease modifications

b) makes it harder to consider

extensions and changes in lease terms

c) is expected to be able to adequately

address the potential future events in

commercial leases arising from

COVID-19

d) is not as adept as the predecessor

standard in addressing the accounting

treatment of lease defaults and

modifications

4. When assessing any potential

impairment to goodwill, companies:

a) must apply an undiscounted test for

impairment

b) should allocate any impairment or

decline in fair value against the entire

balance sheet

c) should only be concerned with their

material reporting units or segments

d) need not review any other assets for

impairment

5. Indicators of potential impairment to

good will include decreases to all of the

following EXCEPT:

a) litigation related to asset impairment

directed at the company

b) sales

c) amount of traffic directed to the

company's website

d) revenues or gross profits

6. When it comes to forecasting and

preparing valuations in the current

environment, companies:

a) should try to focus on the long term

b) need not be considered with liquidity

c) should ensure they have

documentation of for all assumptions

used

d) all of the above

7. __________ requires a recoverability

test as the first step in determining

whether assets are impaired.

a) Only International Financial

Reporting Standards (IFRS)

b) Only Generally Accepted Accounting

Principles (GAAP)

c) Both GAAP and IFRS

d) Neither GAAP nor IFRS

You may want to use these objective questions to test knowledge and/or to generate further discussion;

these questions are only for group live purposes. Most of these questions are based on the video

segment; a few may be based on the reading that starts on page 1–13.

Objective Questions

1. COVID-19: Are Your Financial Statements Infected? – Part I

1–12

objective questions objective questions

8. As a result of the recent events, the SEC

is most likely to be focused on which of

the following issues?

a) ensuring CEO compensation does not

exceed certain limits

b) auditor conflicts

c) disclosures around changes of material

changes

d) timeliness of financial statement

preparation

9. According to FTI, as a result of the

COVID-19 pandemic, companies need to

be concerned with ______ of their

internal controls over financial reporting.

a) both the design and operating

effectiveness

b) only the design effectiveness

c) only the operating effectiveness

d) according to FTI internal controls over

financial reporting are not affected by

COVID-19

10. Which of the following is most likely

considered to be a potential trigger

necessitating a test of impairment to

goodwill?

a) a change in the company's external

auditors

b) replacement of the CEO

c) closing of branches in foreign

locations

d) a sustained decrease in share price

Objective Questions (continued)

CPAR/OCT. ‘20

1–13

FTI Consulting

The COVID-19 pandemic is, first and

foremost, a public health emergency of

enormous proportions. The humanitarian

cost to our communities, our country and

the world is vast, and at the time of this

publication, still rising.

While safety and health care threats must

come first, economic concerns follow

shortly thereafter, as we all seek to

minimize the impact on our businesses and

our economy. Companies face many

unknowns regarding the ability to continue

critical operations, generate revenue,

manage contractual obligations, obtain

access to capital and credit, and available

business interruption and other insurance

coverage, to name a few.

Given the significant uncertainties in

today’s global marketplace coupled with

impacts across all geographies and

industries, companies need to

comprehensively evaluate the impact of the

crisis on their accounting, disclosures and

internal controls.

Accounting & Reporting

Issues Potentially Impacted

by COVID-19

Asset Impairments

Adverse events may trigger the need to

prepare an impairment analysis. In these

cases, many companies will need to

reevaluate the inputs used in impairment

models for assets, particularly with respect

to expected future cash flows. Impairment

issues can take many forms, including:

—Goodwill & Intangible Assets –

Assessment of impairment for goodwill

and indefinite-lived intangibles in

accordance with ASC 350, as well as

finite-lived intangibles in accordance

with ASC 360.

1–13

Self-Study Option

Reading (Optional for Group Study)

COVID-19 IMPACTS ON ACCOUNTING, DISCLOSURES

& INTERNAL CONTROLS

reading reading reading reading

lIn order to ensure adherence to

NASBA guidelines regarding self-

study, the CPA Report and CPA Report

Government/Not-for-Profit Self-Study

Professional Education Centers are no

longer available. Customers should

contact their company administrators

for information on taking course exams

and receiving CPE credit for the

courses.

lCustomers may contact Kaplan

Financial Education at

cpesupport@kaplan.com to obtain

certificates previously earned through

the CPA Report Self-Study and CPA

Report Government/Not-for-Profit Self-

Study Professional Education Centers.

lCustomers interested in the self-study

format of the CPA Report can find

information on Kaplan Financial

Education's self-study libraries at

Online Accounting CPE Courses.

CPA Report Update

1–14

—Trade Receivables – Evaluation of

historical loss rates to determine if and

how they differ from what is currently

expected over the life of current trade

receivables (on the basis of current

conditions and reasonable and

supportable forecasts about the future).

—Inventory – Assessment of excess and

obsolete inventory reserve requirements

in accordance with ASC 330.

—Held to Maturity Debt Securities –

Assessment of reasonable and

supportable forecasts required to

support revisions of estimated

impairment losses resulting from

changes in market conditions.

—Fixed Assets – Assessment of

impairment in accordance with ASC

360 that may result in recording an

impairment charge and/or a change in

useful lives.

—Capitalized Software – Assessment of

impairment of software development

costs in accordance with ASC 985- 20

for costs of software to be sold, leased

or marketed, or in accordance with the

internal use software guidance.

Fair Value Measurement

The current volatility in the economy and

financial markets will likely present

challenges in determining the appropriate

inputs to fair value measurements in

accordance with ASC 820 for assets and

liabilities such as investments and certain

financing obligations, similar to past

periods when transactions were not orderly,

such as during the 2007-2008 credit crisis.

Hedge Accounting

The uncertainty in the current business

environment may also result in the need to

reassess the probability of hedged

transactions occurring, which could result

in the determination that hedge accounting

is no longer applicable under ASC 815.

Debt Modifications & Loan

Covenants

Many companies are experiencing negative

impacts on operations and cash flows that

could adversely impact the ability to

service debt or comply with debt

covenants. Such companies may need to

obtain waivers for covenant violations,

modify existing debt arrangements or enter

into new financing arrangements.

Challenging accounting and presentation

issues can include the following:

—Debt Modification Vs. Debt

Extinguishment – Assessment of

whether an amendment to a debt

arrangement should be treated as a debt

modification versus a debt

extinguishment in accordance with

ASC 470-50.

—Troubled Debt Restructuring –

Assessment of whether a debt

restructuring meets the criteria for

troubled debt restructurings in

accordance with ASC 470-60.

—Balance Sheet Classification –

Assessment of how covenant

violations, covenant waivers, post-

balance sheet refinancing transactions

and subjective acceleration clauses

affect short-term vs. long-term debt

classification.

Revenue Recognition

Companies are required to estimate

variable consideration at contract inception

and to revisit those estimates at each

subsequent balance sheet date throughout

the term of the contract. In many cases, the

changing business environment will require

reassessments of those variable

consideration estimates in accordance with

ASC 606. In addition, assessments may

need to be made of potential impairment of

costs to obtain or fulfill a sales contract.

Insurance Recoveries

Companies are scrutinizing their business

interruption and overall insurance coverage

and preparing claims in light of the COVID

19 situation. Insurance recoveries give rise

reading reading reading reading

CPAR/OCT. ‘20

1–15

to financial reporting matters including

recognition and disclosure of anticipated

reimbursements in accordance with the

ASC 450-30 gain contingencies guidance,

as well as the income statement, balance

sheet, and cash flow classification of any

recoveries.

Bankruptcies & Restructurings

Some companies that are negatively

impacted may need to restructure in order

to reduce operating expenditures such as

facilities and workforce, which may

include asset impairments, lease

termination costs and dealing with

workforce termination benefits. COVID-19

is also sure to cause some companies to file

for Chapter 11 bankruptcy, which involves

specific accounting and financial reporting

implications, both during the bankruptcy

and upon emergence from bankruptcy.

Financial Statement Disclosures

Companies will need to assess many

potential U.S. GAAP disclosure

requirements, including loss contingencies

in accordance with ASC 450-20, risks and

uncertainties in accordance with ASC 275,

subsequent events in accordance with ASC

855 and going concern in accordance with

ASC 205-40. In addition, public companies

will need to assess the timeliness, accuracy

and sufficiency of disclosures around the

impacts of the pandemic on their business,

including in the Management’s Discussion

and Analysis (MD&A) and Risk Factor

sections of their Form 10-K and 10-Q

filings.

Internal Controls Over Financial

Reporting Implications

Companies will need to evaluate both the

design and operating effectiveness of their

internal controls as this pandemic changes

their daily operations. For example,

closures of facilities and employee absence

due to responsibilities at home or illness

may result in a lack of available

information or ability to maintain the

effectiveness of internal controls. In certain

cases, this can lead to a high-risk

environment where normal controls are

being bypassed in order to meet

governmental or customer demands. This

may require implementing new controls or

reliance on other mitigating controls for

which the operating effectiveness has not

been tested.

On top of these constraints, the regulatory

demand for information is unwavering, as

referenced in SEC Chairman Jay Clayton’s

comments, on the SEC’s order (Release

No. 34-88318) providing conditional

regulatory relief, which requires registrants

to “provide investors with insight regarding

their assessment of, and plans for

addressing, material risks to their business

and operations resulting from the

coronavirus to the fullest extent practicable

to keep investors and markets informed of

material developments.” As new or

increased risks emerge, companies may

need to quickly modify their controls or

design and implement new ones. This may

result in additional required disclosure to

stakeholders, including for changes to the

control environment in SEC filings.

The opinions expressed are those of the

author(s) and do not necessarily reflect the

views of the firm, its clients, or any of its

respective affiliates. FTI Consulting, Inc.,

including its subsidiaries and affiliates, is a

consulting firm and is not a certified public

accounting firm or a law firm.

FTI Consulting is an independent global

business advisory firm dedicated to helping

organizations manage change, mitigate risk

and resolve disputes: financial, legal,

operational, political & regulatory,

reputational and transactional. FTI

Consulting professionals, located in all

major business centers throughout the

world, work closely with clients to

anticipate, illuminate and overcome

complex business challenges and

reading reading reading reading

1–16

reading reading reading reading

Impairment considerations

in the current environment

What industries are at the greatest

risk for impairment issues?

Oil & gas has been hit hard and the current

environment has exposed Preexisting

weakness in this market, primarily excess

supply. Reduced travel and supply chain

issues created by COVID-19 have

significantly decreased demand.

In the retail sector, more than 26 major

retailers have filed bankruptcy in 2020.

Retailers with a strong internet presence

have managed to weather the storm while

retailers with traditional models have not

been able to survive. Lord & Taylor,

JCPenney, Brooks Brothers and J Crew are

just a few of the prominent entities that

have sought bankruptcy protection.

Hospitality and tourism have also been

severely impacted. Hertz has filed

bankruptcy and others may follow soon.

However, there is some hope for certain

sectors as Americans are starting to travel

again. The US Bureau of Transportation

Statistics (BTS) noted that Americans took

over 184 million trips at least 50 miles

from home over the Labor Day weekend1.

That is up 10% over 2019.

While there is progress, we noted that air

travel still has a long way to go to recover

to pre-COVID levels with Labor Day travel

still down 40% from 20192. Unless action

is taken by congress to replicate the

subsidies given to the airline industry in the

CARES Act, it is estimated that more than

80,000 airline employees will be

furloughed. Unfortunately, based on current

bookings it does not appear that Americans

will return to flying at pre-COVID levels

anytime within the next year.

Stay-at-home orders have forced many

businesses to shut down or operate at levels

that are not sustainable. Many small

businesses will not survive lockdown

conditions. The impact is hardest on small

businesses who don’t have the capital to

sustain their business while complying with

requirements mandated by state

governments to maintain social distancing

and other COVID related practices.

In manufacturing and Aerospace, there

have been immediate and significant

declines in demand. Boeing’s CEO expects

that it will take lost demand 3-5 years to

recover.

Meanwhile, large banks have taken

significant loan loss provisions as they

revise their forecasts to consider potential

losses in commercial real estate and

consumer lending. We have noted that

some goodwill impairments have already

recorded for several banks.

What are the most common trigger

events that require an assessment

of goodwill?

If the fair value of the reporting unit is

more likely than not lower than its carrying

value, it may trigger an impairment test.

Among the many potential triggers that

necessitate a test of impairment of

goodwill, the most likely include

lCurrent Macroeconomic conditions

lIndustry specific and market

considerations

lEvents affecting a reporting unit

lSustained decrease in share price

lCost factors

lOverall financial performance

In this economic environment, qualitative

tests will likely result in interim

impairment testing.

What lessons can be learned from

impairment related litigation and

enforcement actions that occurred

in the last recession?

First of all, we know litigation spikes

significantly in impacted industries. In the

great recession it was the financial service

space that dominated securities class

actions. In the current environment, it is

likely that many more industries will be

impacted as we alluded to earlier. During

the last recession, the SEC dramatically

increased its scrutiny of reporting unit

CPAR/OCT. ‘20

1–17

determinations, timing of impairments and

the calculation of the ultimate charge. We

expect that the SEC will be very focused on

timing of impairments, disclosures and

indicators of early warning signs. During

the last recession comment letters from the

SEC inquiring into goodwill impairment

matters spiked significantly as the recession

wore on. This was followed by a spike in

enforcement actions. We should expect the

same this time around. In relation to

COVID, we have noted that the SEC’s

efforts to forewarn issuers about the need

for transparent and informative disclosures

appear to have been heard. We have noted

fewer comments from the SEC with regards

to COVID-19 disclosures than may have

been expected.

It’s good to remember that the SEC and

other stakeholders will use the benefit of

20/20 hindsight to evaluate the sufficiency

of disclosures and timing of impairments.

The big question issuers should be asking

is “why now”? Despite the numerous

distractions and pressure on management,

they need to be prepared for that level of

scrutiny. This means thorough and diligent

documentation of key assumptions, changes

and thorough analysis of timing. This

documentation needs to be

contemporaneous to allow internal controls

over significant judgements and estimates

to be deemed effective.

In its May speeches, Steven Peikin, Co-

Director, Division of Enforcement, May 12,

2020 noted the following, “Previous

economic downturns proved that stresses on

the financial conditions of issuers may raise

the risk to investors from financial

statement and issuer disclosure frauds in

two ways:

lexposing pre-existing accounting or

disclosure improprieties, (issues with

prior allocation of assets among

reporting units or previous ˆvaluations)

lleading issuers to engage in improper

conduct (current manipulation of

valuations)

The SEC also indicated that it would be

looking for disclosures, impairments, or

valuations that may attempt to disguise

previously undisclosed problems or

weaknesses as coronavirus-related.

Finally, the SEC is also, “…looking to

evaluate the adequacy of disclosure of

material changes in disclosure controls or

internal controls over financial reporting.

Changes to the business and additional

uncertainties may result in additional risks

or material misstatement to the financial

statements in which new or enhanced

controls may need to be implemented to

mitigate such risks…”

What are the key valuation risks

that should be carefully considered

by reviewers of impairment?

The level of uncertainty is greater than ever.

Uber is a great example of this uncertainty

in their steps to withdraw earnings

guidance. This significant uncertainty has to

be reflected in the assessment of

impairment and the underlying calculations

required in an impairment analysis.

The risk of engineered valuations is

significant. Often 50% or more of the value

related to forecasted cash flows is related to

terminal value and expected perpetual

growth. These values and expectations are

often based on the last year of a cash flow

analysis. Experience tells us that

management tends to predict cash flows in

the shape of a hockey stick with immediate

periods having slow growth which turns

into more sustained higher growth as

management’s plans take hold.

Reviewers of these valuations should

carefully consider the weight of evidence

supporting the inputs and assumptions

underlying critical valuations. Unsupported

or aggressive assumptions should be

challenged and resolution of review

controls should be well documented. Clear

focus should be on the most significant

elements of the estimate that drive volatility

and growth.

When asked how to deal with uncertainty,

we believe that uncertainty should be built

into the weighting of various probability

weighted cash flows and the discount rate.

There should be clear articulation of how

discount rates are derived and why (or why

not) they have changed. No change in the

reading reading reading reading

1–18

reading reading reading reading

1–18

discount rate used from previous

assessments could be a red flag given the

rapid economic changes observed during

2020.

As such, companies need to strongly

consider whether a change in the historical

discount rate is needed. An additional risk

premium may be required to contemplate

significant uncertainty in current and future

expected economic conditions.

Finally, management should be thoughtful

to ensure that forecasts used for various

operating and financial reporting reasons

are consistent. Internal controls should be

designed to ensure that the expectations of

management used in forecasting for any

need are supported and consistent.

How does the impact of CECL

impact the assessment of

impairment of financial assets?

For those that have adopted, primarily

financial institutions, CECL requires an

estimated lifetime losses. The risks inherent

in performing valuations of reporting units

are also inherent in CECL estimates. The

uncertainty introduced by COVID and

current market conditions both need to be

considered in the estimate of lifetime losses

for financial instruments. For those that

adopted CECL at the beginning of the year,

significant shifts from the original forecasts

used are likely necessary to take into

account unforeseen regulatory action, a

significant increase in bankruptcies and the

uncertainty of when and how specific

industries as well as the global economy

will recover. These uncertainties will

extend to the domestic and global economy

as well. As a result, we expect that with so

much uncertainty and the significant risk

related to forecasting that banks will look

to peers and closely monitor how the

estimates of the large sophisticated

institutions are reported. It is not

unreasonable to believe that absent a few

differences to unique portfolios,

management of banks will feel safer being

within a reasonable range of a large number

of peers.

What are the related pressures,

incentives and opportunities to

commit financial reporting fraud

that may need to be considered in

an entity’s Risk Assessment?

Numerous pressures on management

include meeting sales targets, loss of

income could result in immediate financial

hardship, maintenance of debt covenants to

avoid default, pressure to meet market

expectations or simply staying employed.

The current environment and uncertainty of

the future provides opportunities to defer or

hide previous issues. Examples include

using aggressive estimates, intentionally

restructuring reporting units solely to avoid

impairments, or the cleaning up of prior

accounting issues (i.e. a big bath). There is

also the opportunity to take overdue

impairment charges and blame the current

business environment. Conversely, use of

ultra conservative estimates creates an

opportunity for future earnings

management. Finally, restructuring and

engineering reporting units to trigger

current period impairments to avoid a

future drag on earnings is also a possibility.

Aside from impairment, what other

reporting considerations should be

considered?

Executive Compensation will be closely

scrutinized. As an example, the timing of

stock grants could become questioned

relative to volatile market events

(forfeitures, unclear performance

conditions, modifications, etc.),

Subsequent Events can present a challenge.

For instance, there could be challenges in

separating recognized from unrecognized

subsequent events based on what conditions

existed at the balance sheet date. Further,

the consideration of clear and transparent

disclosures on COVID-19 impact on the

financial statements is complex and

requires significant judgment. As

previously noted the SEC will be looking

for disclosures, impairments, or valuations

that may attempt to disguise previously

undisclosed problems or weaknesses as

coronavirus-related.

CPAR/OCT. ‘20

1–19

The reality of Going Concern should also

be considered. Additional disclosures may

be required if an entity determines COVID-

19 impacts its ability to continue as a going

concern. Auditors, shareholders,

debtholders and others will be focused on

these required assessments.

In terms of revenue recognition, updating

estimates for variable consideration will

require significant judgement and likely

additional disclosures. Terminations

involving variable consideration are likely

to drive questions from stakeholders.

Finally, we noted a significant increase in

the SEC’s evaluation and comments around

non-GAAP disclosures. Careful assessment

of how COVID-19 impacts may

qualify/disqualify as a non-GAAP measure

is needed. Clear and transparent disclosures

of non-GAAP metrics should be

thoughtfully explained and reconciled back

to GAAP measures. Management should

expect that these measures will be closely

scrutinized.

Our final message

The current environment has created

significant pressures on management to find

ways to sustain their businesses in

unprecedented times. This pressure

provides potential rationale for management

to take advantage of opportunities to

manage earnings through various methods.

The methods most likely to be utilized

relate to judgmental estimates subject to

subjective management review controls. It

is incumbent on fiduciaries to ensure that an

appropriate risk management assessment

that considers these unprecedented risks has

been performed. Further, management

should take additional steps to reinforce

ethical behavior to alleviate the pressure

facing middle management and operations

that are naturally going to occur in a

business environment such as this.

Companies with the strongest ethical

cultures will have a significant advantage

over those that have not emphasized the

need to adhere to the modern-day

expectations of the market, the public and

shareholders alike.

The opinions expressed are those of the

author(s) and do not necessarily reflect the

views of the firm, its clients, or any of its

respective affiliates. FTI Consulting, Inc.,

including its subsidiaries and affiliates, is a

consulting firm and is not a certified public

accounting firm or a law firm.

____________________

1 https://www.bts.gov/covid-19/labor-day-

weekend

https://www.tsa.gov/coronavirus/passenger-

throughput

reading reading reading reading

1–201–20

1–201–201–201–201–201–201–201–201–201–201–201–201–201–201–20

1–20

video transcript video transcript

SURRAN: In the era of a global crisis due to COVID-19, many economists expect

2020 to be the year where we will experience the worst recession since

the Great Depression.

Many industries, such as oil and its gas, retail and manufacturing,

hospitality, portions of the transportation sector, tourism, aerospace

manufacturing and many others have reported goodwill impairment in

the first two quarters of 2020 and more impairments are likely to spike

before the end of the year.

Under U.S. GAAP, Generally Accepted Accounting Principles, private

companies that don't elect to amortize goodwill and public companies

must test for impairment at least annually or more often when

"triggering events" occur and if impaired, they need to write down

goodwill. A triggering event includes negative cash flows from

operations, loss of a key customer, unanticipated competition or an

economic downturn such as a pandemic!

In 2017, FASB, the Financial Accounting Standards Board, issued

Accounting Standards Update (ASU) 2017-02, Intangibles – Goodwill

and Other (Topic 350): Simplifying the Test for Goodwill Impairment.

The standard was effective January 1, 2020 for calendar-year end

public companies, and ironically, the COVID-19 pandemic came at a

time of rule simplification.

ASU 2017-02 simplifies the accounting for goodwill in periods

subsequent to initial recognition by (a) allowing goodwill to be

amortized, and (b) simplifying impairment testing. Note that the

alternative permitted in this ASU may be applied to existing goodwill

as well as goodwill arising from future business combinations.

As we are trying to adjust to a new normal, financial professionals are

striving to understand the impact of the pandemic in financial

reporting, especially when it comes to asset impairment. In addition to

goodwill, property, plant and equipment and other intangible assets

need to be assessed for impairment indicators.

A test of recoverability needs to be undertaken and if the carrying

amount of the asset or asset group exceeds the undiscounted future

cash flows, then under U.S. GAAP, companies need to measure the

impairment and an impairment loss needs to be recognized.

WILLIAMS: The negative economic impact of the virus is certainly considered a

triggering event and justifies an impairment test on Long--lived assets

or asset groups for most industries. Todd Rahn, senior managing

director and lead of accounting advisory practice on the west coast, and

Chris Brown, senior managing director from FTI Consulting, start our

segment by discussing industries that are at the greatest risk for

impairment issues.

RAHN: There are a number of industries, obviously, that have been impacted

by 2020, and the impact of the pandemic. Clearly, frankly, no industry

has been left untouched. So that's the first thing is that as we all think

about impairment, and value that is on our balance sheet, that everyone

needs to be taking a close look at even areas that probably haven't been

a focus in the past. For me being in the Bay Area, technology and life

Video Transcript

1. COVID-19: Are Your Financial Statements Infected? –

Part I

CPAR/OCT. ‘20

1–21

video transcript video transcript

sciences are top of mind. And we all know that that value has been doing

very well, especially in the public markets.

With actually having one of the banner years for IPOs in 2020, which is a

little bit unexpected obviously given where we were earlier in the year.

But that said, for those in the industry, in technology and life sciences

that may have particular issues or not necessarily, quote, unquote,

"benefitting," from what's going on in the current environment.

What's important to remember is that a lot of the value for those

companies is locked up in intangible assets. And that includes goodwill,

intangible licenses or other technology that's been acquired over time.

And all of those need to be considered and looked at very closely.

WILLIAMS: Chris Brown gives us his views.

BROWN: In addition to the industries that Todd mentioned, there's been many that

have been impacted. But oil and gas come first to mind. There are pre-

existing weaknesses in the market already due to excess supply. And

that's been exacerbated by COVID-19 and the related decrease in

demand.

Retail has been hit significantly. Over 26 major retailers have filed

bankruptcy so far in 2020. Entities like Lord and Taylor, JCPenney,

Brooks Brothers among many. And those that are surviving have a strong

online presence and came into COVID with that strong presence. And

that's really been essential to their survival.

Or the hospitality and tourism industry has been significantly impacted.

Labor Day travel is expected to be down 70% year over year. So you

have entities like Hertz who filed bankruptcy, and you see cuts at the

major airlines. Hotel chains as well.

Portions of the transportation sector have also been impacted. Uber for

example, laid off 3,000 employees, closing 45 offices. And that was

withdrawn guidance going forward because of their inability to predict

what actually is going to happen. You couple that with manufacturing

aerospace, and then even in the banking sector, I think there's some risks

there. We've seen some goodwill impairments already. So certainly, it's a

much wider swath than we saw in the great recession.

WILLIAMS: One other industry severely impacted by the pandemic in that they face

not only impairment, but also lease modifications, is real estate. Todd and

Chris give us their thoughts.

RAHN: As far as the real estate industry, a couple things to note. I would say first

is that we've all been witnessing in our personal lives the continued push

of folks to move actually out of the cities.

In fact, we've seen house prices for example on the residential side,

skyrocket in many places outside of cities and suburban locations, and

even further out. Because remote to work and other situations allow that

to occur, and probably will. In fact, you have companies such as Google,

Facebook, Twitter, and others that are telling companies that that the

employees can be located at least for the next year outside of their

normal working location.

So that for one, I think, impacts anybody that's involved in the housing

industry. That said, the volume that that brings actually is positive, right?

Is that there's a lot of volume that's happening both on the sell side in

cities, and buy side further out.

1–22

video transcript video transcript

But the big story, I think, for real estate is commercial. On the

commercial side, you just don't have obviously people in physical

locations. So companies, government agencies, and others are not

investing in those offices, because there's no need to. So that is going to

create a massive glut of space, especially within the city environments

and any kind of office locations. And that adversely has a big and wide

swath of impact on companies that are either contractors, construction,

or that they're not involved in that commercial real estate.

But number one would be, those that actually hold that square footage,

leasing it. And that's going to create a number of issues related to either

lease obligations if you're a tenant. Or if you're a landlord, how do you

fill that space in your revenue line?

If you look at what the large banks have been providing as far as loan

losses, you see massive loan loss provisions particularly in the second

quarter under CECL, which are lifetime estimates of losses. And a big

factor that is being driven by commercial real estate.

So it's kind of a leading indicator before the fire really gets to the door of

what is expected by those who have significant financial interests in

commercial real estate.

WILLIAMS: Before we go back to our discussion on asset impairment, it is important

to raise one question relating to lease modifications for public companies

that have already adopted the lease standard and the impact on private

companies, even though the standard has been extended to 2021.

BROWN: I think if you look at again, what the large banks have been taking

relative to loss provisions, you can see there's an expectation that that

income that we were expecting from leases is just not going to be what

they expected.

I think we should expect modifications. Which again, when those happen

under the current rules, you take an immediate loss for the entire

expected life of the lease. So I think we've seen some, and I think as the

year continues, we are going to expect to see a lot more.

RAHN: Public companies that have adopted 842. That provision was under the

valuation and work for a decade. It was a long, long process and also

included the ISB obviously in aligning with IFRS. Topic 842 in my view

is more built for scenarios like this.

It makes it a little bit easier to consider lease modifications. It also

makes it easier to consider extensions and changes in terms. And

certainly, as we saw earlier in the year related to, as you mentioned,

private companies.

The FASB and the SEC have proven that they're willing and able to

provide accommodations. And so we may not have seen the last of those

as this continues to push through the system. Not indicating that I'm

aware of any coming, it's just that in applying 842, taking into account

those modifications, and then the standard is frankly being better built,

then 840 is a good sign that the system will handle it a little better than it

has in the past.

SURRAN: It is interesting to think that twelve years ago, almost to the day, we went

through another financial crisis. In September 2008, Lehman Brothers

filed for bankruptcy, Bank of America acquired Merrill Lynch and the

Federal Reserve bailed out AIG to prevent its collapse, as AIG had

losses and collateral obligations amounting in billions of dollars they

couldn't cover. A massive bailout plan was approved by Congress and

CPAR/OCT. ‘20

1–23

video transcript video transcript

later in the month, the Treasury Department guaranteed U.S. money

market funds… and that was considered unprecedented!

In February 2009, President Obama signed into law the American

Recovery and Reinvestment Act, which provided approximately $800

billion in stimulus to boost the economy.

In July, 2010, the Dodd-Frank Wall Street Reform and Consumer

Protection Act was enacted in an effort to improve financial stability and

consumer protection.

Fast forward to 2020, the COVID-19 pandemic forced governments

around the world to create stimulus packages. The United States passed

into law the Coronavirus Aid, Relief and Economic Security (CARES)

Act, which is worth more than $2 trillion dollars, in order to help

businesses, individuals and states deal with the economic crisis, while

other countries took a different approach to spending and government

assistance.

And yes, government assistance is always beneficial but it does not solve

other problems companies are facing to stay afloat. One of the common

themes in times of turmoil and economic downturn is lawsuits.

Historically, the most common lawsuits that U.S. companies face might be

labor and employment, contracts or privacy suits.

Asset impairment-related litigations are always on the rise as companies

are severely impacted during a financial crisis.

Litigations increase across various industries as people look for someone

to blame or pay for the consequences of the pandemic in their lives, but

even though the coronavirus may be to blame, it can't stand on trial.

WILLIAMS: Chris Brown discusses lessons learned from impairment related litigation

and enforcement actions that occurred in the last recession.

BROWN: First, we know litigation spiked significantly in impacted industries. So in

the great recession, it was the financial service space that was really

dominating securities class actions.

In the current environment, it's likely that many more industries are going

to be impacted as we alluded to earlier. It's just much broader.

Second during the last recession, the SEC dramatically increased its

scrutiny of reporting unit determinations, timing of impairments, and the

calculation of the ultimate impairment charges that the companies took. I

think the SEC's going to be very focused on timing, disclosures, and

indicators of early warning signs in this period. They've alluded to that.

In the last recession. We saw comment letters from the SEC inquiring into

goodwill impairment matters spike significantly as the recession wore on.

And then this was followed by a spike in enforcement actions as well. We

should also expect that. It's good to remember that the SEC and other

stakeholders are going to use the benefit of 2020 hindsight to evaluate the

sufficiency of disclosures, as well as the timing of impairments.

The big question is why now? That's always the question that gets asked

by auditors and other stakeholders. Despite the numerous distractions and

pressure on management, you really need to be prepared for that level of

scrutiny. This means thorough and diligent documentation of key

assumptions, changes and the thorough analysis of timing.

1–24

video transcript video transcript

WILLIAMS: Todd gives us his thoughts as to how COVID-19 has impacted the risk of

impairment.

RAHN: What companies are faced with is, you kind of think back to fall of 2019,

right? The economy is doing really well. There's been a lot of

government policy that has driven towards growth. Stock market's doing

great. The M&A market is very hot. I mean, just a lot of things were

heading in that upward direction. I don't know about you, but I feel like

2019 now is about 30 years ago.

That is kind of how accounting feels too, is that you have that situation

now completely shifted to a whole different world.

You take companies that were built around that economy in 2019, that

may have been completely gone as we've already touched on. I mean,

literally overnight certain industries and sectors are no longer around. So,

what that drives is a lot of exposure to potential impairment charges,

dealing with things like restructurings, going concern issues, all those

types of things that I'm sure we're going to get into.

The key for me and the SEC made comments on this at least twice

leading into the pandemic, with informal statements, is that the

expectation there for all investors is that companies are being very

transparent with what is driving risk in the organization. And specifically

to impairments, which assets may be subject to additional impairment

charges that they haven't taken already.

WILLIAMS: But what are the most common triggering events that required an

assessment of goodwill?

BROWN: Among many of the GAAP lists, I think the key ones right now are

macro-economic conditions, obviously with the way that COVID-19 has

hit, and people staying home from work, we've got significant concerns

there. Industry specific and market conditions also come into play. And

you could have for example, companies that have reporting units that are

really strong, and then reporting units that are not as strong in the current

environment. And if an event is affecting reporting, that would be a

trigger as well.

And then you also, for example, need to consider where the stock prices

of a publicly traded company are, and if it has a sustained decrease in

share price over time, that would be another trigger that needs to be

considered.

WILLIAMS: Todd discusses how the assessment of goodwill impairment is required to

be performed.

RAHN: We'll focus on the U.S. GAAP first. That's a great question as well,

related to goodwill. So thankfully with goodwill, the test has been

cleaned up a little bit over the past couple of years. The timing is perfect.

As we all may remember, it's gone through a lot of different iterations

from 15, 20 years ago being an amortization model where you kind of

use an undiscounted test for impairment.

The FASB tried to fix that through this two-step test, which you would

just determine if any particular reporting unit, which Chris touched on

earlier, slash segment, slash company was experiencing a decline in fair

value based on indicators. Then actually having to do an allocation of

that fair value against all of the balance sheet. But thankfully that's all

behind us. And it's a good thing.

CPAR/OCT. ‘20

1–25

video transcript video transcript

So simply now, the number one thing again, Chris touched on this, that's

critical for companies to focus on is, they have to make sure that they

have a very clear understanding of what their reporting units are within

their business.

If they have just one reporting unit for smaller companies, that's fine. But

the expectation is certainly for larger private companies and public

companies, they typically have multiple segments and multiple reporting

units, which also can be within each segment. So the most critical first

step is getting that question right.

From the public company perspective, the SEC is very focused on that.

Because naturally what the FASB and the SEC are trying to prevent is

hiding an impairment problem at a particular portion of the business,

through the profitability of another portion of the business.

Then currently in the pandemic and the impact of COVID, it's very easy

for that to happen. To have one portion of the company performing well,

and an important portion of the company not performing well. So that

reporting of your definition is critical.

It all gets into the similarity of those parts of the business, and there's

various indicators. I can be happy to go through if that'd be helpful. But

once you have that correct, every time there's an impairment indicator at

least once a year, the company has to look at, "is the fair value of that

reporting unit greater or less than its book value"?

Now under the current standard, once that's been done. And if it is a

situation where they're reporting you as declined in value below the book

value, then you just simply book that against goodwill until the goodwill

has disappeared.

Naturally what's lost, I think sometimes in that, and why it was so easy for

the FASB to pivot to that model, is because that naturally if you're doing

that, and you have impairment indicators that are driving you to look at

your goodwill impairment.

Of course, they may impact other assets that are on your balance sheet

too. It's not to say that if you have an impairment problem, that means you

ignore impairment of other assets.

It's just that in the calculation of doing the goodwill impairment charge,

you're not forced to go through this, frankly, quite extensive process of

evaluating your entire balance sheet. You just take the charge against

goodwill, but also make sure you're keeping in mind that those indicators

that drove the charge in the first place may also mean that your fixed

assets, other intangibles or other areas are in fact impaired.

WILLIAMS: Todd elaborates further on impairment indicators through a real-life

example.

RAHN: I will say that to add to those very often, what happens is say that in the

budgeting process, or let's take a real-life example. Maybe a little more

urgent example, is say a particular product line or something is not doing

very well. Margins are down a certain percentage. It could be that it just

has to be that those indicators, and it can be maybe that, as we said, sales

are down, but also it can be because if there's a particular drop in the

number of customers, or if it's a tech company, the amount of traffic to

your website, or it can be any number of indicators, whatever you evaluate

your business on is a good way to always look at that. How you discuss

your business with analysts, that's the indicators that you always want to

keep in mind in the context of GAAP.

1–26

video transcript video transcript

It just has to be that those would present a situation that it's more likely

than not that you have a potential impairment charge, is when you

actually have to go in and do that.

Now, you're forced to do it every year, but that's when those indicators

drive that conversation.

Other ones that I think about can relate to employment movements, it

can relate to drop in gross profit, as I mentioned, drop in revenue. Those

would be the main ones that typically will drive an impairment analysis.

WILLIAMS: But what are some of the important considerations when it comes to

reporting units?

RAHN: On the topic of reporting units, as I mentioned, that is a critical

assessment in everybody's eyes to make sure that you have the right ones

identified. Once you do, and the way you do that, maybe I should start

with, is that you determine, okay, are they similar to each other in

general? So similar to segment analysis where you would have a similar

thing in a segment, and you would have a similar thing in a reporting

unit. So number one is, is that portion of the business owned by

somebody within the organization? And then, immediately on the back

of that is, are there financial results of the reporting unit they're

responsible for?

Those are not really the hard ones. It's simple. If you look at a typical

organization structure, most companies, whether they like to admit it or

not, you can start to figure out what the hierarchy is, who owns what,

and how much it relates to other portions of the business.

The place where it gets tough, and frankly, there just is judgment that

you can't get out of it, is related to economic characteristics. So it's more

common in segments that companies will, frankly, try to argue that

segments need to be aggregated because they have similar economic

characteristics, and the SEC has been harping on that for years, but let's

not forget that there's very similar criteria that exist at the reporting unit

level.

And so, you can, again, aggregate reporting units and you may in fact be

required to, but to use trend analysis and results over time to ensure that

you're looking at that in a fair and objective way and applying

appropriate judgment, clearly the tension being that, okay, I have one

particular reporting unit area, or potential reporting unit area of my

business that's not doing so hot. Oh, but the margins have been

somewhat similar, or say, even though the revenue trend line is going

down, the margin is staying similar, that's typically not going to cut it.

What you have to do is look at all lines, margins, income, whatever's

available, revenue. They need to be in a similar trend, very similar area

of profitability, and that is what allows it to be aggregated. Otherwise, it

needs to be evaluated separately and considered for a potential

impairment charge.

WILLIAMS: Chris continues with his thoughts on reporting units.

BROWN: In addition to what Todd said, I think I'd point out that when you do a

restructuring and you have reporting units changing, now there's an

exercise where you would go through and reallocate goodwill. When

those occur the SEC and any stakeholders will be very focused on the

outcome of that and the basis for that approach and that determination,

because you can hide goodwill impairment and you could also, for

example, take more goodwill impairment, e.g., the big bath.

CPAR/OCT. ‘20

1–27

video transcript video transcript

So it's very important that if that's being undertaken that there's thorough

documentation and it's consistent with the way that the business has

operated and ran.

SURRAN: We are nine months now into the pandemic and we can't see the end of it

yet. The impact of the pandemic has been detrimental for most industries

on a global scale and business valuations are becoming increasingly

important in support of financial results, forecasting and financial planning

as well as mergers, acquisitions and even litigations as we previously

discussed. But how do you deal with the unknown?

A lot of companies were showing zero or close to zero revenues in the

months of April through June and they are now starting to pick up but it is

not nearly close to what revenues used to be.

Forecasting the long term may still be a thing of the past, as most

executives are looking at short-term goals and expected results. Maybe

looking at three or four months down the road is not so bad as it can be

more realistic and has also become a new trend that valuation

professionals are seeing.

A short-term forecast or projection gives executives a better understanding

of how liquid they are, how to or if they will continue to stay in business

or whether they would need to close their doors.

Valuation professionals expect a shift over the coming year as the

uncertainty is reduced. Companies should align current results with their

expectations, adjust if necessary, or disclose what was done and continue

to assess.

WILLIAMS: Chris continues with the key valuation risks that companies should

carefully evaluate.

BROWN: I think, first of all, it's just engineered valuations. So what I refer to it is

the hockey stick approach, where you see certainty in the forecast, and

then as it goes out, there's less certainty. And often what will happen is

over 50% of the value of a reporting unit is going to be in the terminal

value, which is assuming perpetual growth and that's often based on the

projection of the last year.

So you want to make sure that whatever you're doing in that projection,

you've got thorough documentation support for all of the assumptions.

Unsupported assumptions have been really for entities that have been

investigated by the SEC where enforcement action has been taken.

There's a probability issue here where you could have probability

weighted cash flows, but how do you pick which probability is more

likely in the scenario where there's a significant amount of uncertainty?

And so, we would look to the discount rate and you'd want to see that the

discount rate is taken into a place of risk premium to account for that

uncertainty, and I think that if there's no changes in the discount rate from

previous evaluations, that should be viewed with skepticism and

challenged.

WILLIAMS: Todd Rahn explains the differences between IFRS and U.S. GAAP.

RAHN: Between IFRS and U.S. GAAP, the models have been aligning over the

past years, as we've talked about in other areas. So thankfully, there's not

huge differences, but there still remains one that is a very significant area

of impairment, and that relates to the impairment evaluation for assets that

are amortized or depreciated.

1–28

video transcript video transcript

What U.S. GAAP includes is this recoverability test, and so it applies to

amortized intangibles, it applies to fixed assets that are depreciated, is that

we compare, as a first step, again, that recoverability test in GAAP, we

compare the undiscounted cash flows of those assets or asset groups, and

we compare that to the book value. Clearly, especially given what Chris

just said about the hockey stick, terminal value, and the significance that

often discounts can have, particularly for companies that have more

volatile businesses, the undiscounted cash flow stream can actually be

substantially higher and different from a discounted stream.

And so, that just means that oftentimes with the U.S. GAAP, you just don't

have, especially if it's a longer-term license, for example, that's an

intangible, it's on your Balance sheet.

Most intangibles these days are amortized for U.S. GAAP. You're not

going to have an impairment charge at first because you are still passing

that recoverability test.

IFRS does not have that step. IFRS just looks at what the indicators are of

impairment, and then if there are any, you evaluate the fair value against

the book value and that's it.

And so, that can still create a pretty substantial difference. Other than that,

mostly in the impairment area, it's mostly aligned, again, because of the

efforts of the FASB and the ISB.

WILLIAMS: Chris Brown gives us some highlights on the SEC's perspective on

goodwill in the current environment.

BROWN: I think the SEC has looked to previous economic downturns and focused

on two items relative to potential issues with disclosure or mistiming of

impairments.

The first is exposing preexisting accounting or disclosure improprieties.

So in other words, there were issues before that now the current

environment's going to allow it to get washed away and maybe focused

and pointed at COVID.

So that will be a situation where they would go and look at the timing of

that and look at the economic facts before, leading up, before COVID, to

see if really there should have been something that should have been done

earlier.

Secondarily, it's going to be, okay, well now, there's an opportunity for

issuers to engage in improper conduct, either through manipulation of

valuations, either positive or negatively, either taking a bath to avoid

maybe some hanging on of reporting that's not doing so well, or to

continue to hide things and maybe defer in the hope that things are going

to recover when the economic reality says that now's the time to take the

impairment.

Another area they're going to be looking through is the disclosures around

changes of disclosure controls, as well as changes in internal controls over

financial reporting. Material changes are required to be disclosed, and

they're going to expect that some changes are being made in control

structure to address changes in the risks that have evolved this year, which

have been significant. So registrants and users should be really focused

and cognizant of that, and those disclosures need to be made if material

changes are made.

CPAR/OCT. ‘20

1–29

video transcript video transcript

WILLIAMS: So how do public companies stay ahead of early warning disclosure

requirements while not tipping their hand inappropriately?

RAHN: That is the million-dollar question. And early warning disclosures are

something that are nothing new, meaning the scrutiny from the SEC, they

have continued and always have been focused on, are companies telling

investors enough early on so that they can make the appropriate decisions

leading up to something that ultimately results in impairment charge, for

example, under US GAAP?

And so, again, I point to statements by the SEC this year, and what they

are asking for is a high bar, and what that means they are saying, "Listen,

we understand that companies are taxed. We understand that everyone's

dealing with personal circumstances, from the severe, to the

inconvenience, that are putting a lot of pressure on internal controls."

But in the same breath, they're also saying, "Listen, this is exactly the type

of situation where people need information and they need it timely.", and

so they're putting a lot of emphasis on that.

So the way I would do it, and I could see my clients do it the most

productive way, is that if there is some portion of the business, that's not

doing well because of the current situation or just in general, is to be open

with what is driving the change in the business.

So these are things that analysts want to know anyways, this is what

stakeholders and companies want to know anyways. So do it in a way that

is making it clear that there are drivers that are changing the business.

But at the same time, not going quote-unquote too far, I think the

expression was tipping your hand. Is that not going so far as to, frankly,

disclose information that doesn't need to be disclosed or hasn't been

through the rigor of the internal control environment, and is something

that's ready to be disclosed to the street. Because, believe me, all

stakeholders want and believe companies should be working through their

internal control environment fully before they're disclosing information

out there. So that's the balance, but using things like earnings calls, public

statements, obviously disclosures in management's discussion, analysis

within 10Q's and 10K's, to be as transparent as businesses possibly can

about challenges or things that are coming up that are driving changes in

the business that people want to hear anyway. That will make it a lot

easier to deal with things like announcements related to restructurings,

impairments, and the such in the future periods.

WILLIAMS: And that brings up an interesting point, internal controls. Internal controls

were put in place under a different environment, an office environment,

which is very different from the one we are currently facing where

companies are telecommuting and operating with a skeleton crew as

several employees are still furloughed.

RAHN: So related to internal controls, exactly. That is exactly how I'd frame the

problems. And I will say, the bit of a silver lining is I've actually been

pleasantly surprised at the ability of companies to deal with the challenges

of working remotely this year.

I frankly thought when this was all hitting, that there would be a lot of

phone calls related to these changes. And I'm not saying that there isn't.

There's clearly, every day, we're talking to companies that have a certain

situation, but it seems like it's more driven and dealing with the actual

matter at hand, meaning, okay, I've got a particular portion of my business

is not doing well. Help me understand that.

1–30

video transcript video transcript

Or I'm heading into a restructuring, how do I report that? Or worse. It

could be whistleblower activities, which we'll get back to in a second, but

in just dealing with it.

I think in the current environment we're in, for a lot of industries, not all

of them, some of them you can, and we have to be so thankful to the

workers that are actually out there in the streets, in the grocery stores, in

the hospitals, dealing with all this because they have to be there.

The folks that don't have to be there though, the folks that are able to do

things remotely, the current technology has continued to be a very

productive way of dealing with the things that you're alluding to, and

therefore internal controls are functioning well. So well, in fact, that one

thing that's coming out of the changes in the workforce that we're seeing is

that because companies are going through certainly negative situations.

People are being let go, people are changing jobs, they're moving, they're

dealing with sickness in their home. It could be any number of situations,

that we have seen, the SEC has seen, and we expect to continue to see,

whistleblower activity as that continues to unfold because employees that

are either unhappy with the current situation, or maybe weren't that

worried about something, but now that everything's not going so well,

they suddenly become a lot more worried, which is understandable.

So they key is that internal controls related to whistle blowers, that they

need to be functioning and treated as a priority, both within the company,

and clearly it obviously already is, but within our regulatory regime.

segment two segment two segment two

Segment Two

segment two segment two segment two

COVID-19: Are Your Financial Statements

Infected? – Part II

CPAR/OCT. ‘20

2–1

Learning

Objectives:

Segment

Overview:

Field of Study:

Recommended

Accreditation:

Reading

(Optional for

Group Study):

Running Time:

Video

Transcript:

Course Level:

Course

Prerequisites:

Advance

Preparation:

Expiration Date:

Accounting

December 12, 2021

Work experience in financial reporting or accounting, or an

introductory course in accounting.

None

1 hour group live

2 hours self-study online

Update

“Fair Value Fundamentals – Asset Impairments and Business

Combinations (FVFA4)”

Accounting Continuing Education

Kaplan – Mark D. Mishler, MBA, CPA, CMA

See page 2–13.

See page 2–20.

32 minutes

COVID-19 imposed certain pressures on C-suite executives and

has created an environment that is ripe for fraudulent activity.

Pressure is one of the three legs in the fraud triangle model that can

lead someone to commit fraud, along with perceived opportunity

and rationalization. It’s easy to talk in general terms about pressure,

opportunity and rationalization, but how does each one surface in

day-to-day operations, especially during the pandemic? Todd Rahn,

senior managing director and lead of accounting advisory practice

on the west coast and Chris Brown, senior managing director, from

FTI Consulting, continue our segment discussing related pressures,

incentives and opportunities to commit financial reporting fraud

that should be considered in an entity's risk assessment from a

corporate perspective.

Upon successful completion of this segment, you should be able to:

lIdentify types of pressures, opportunities and rationalization

executives are faced with,

lRecognize challenges companies and auditors face on

inventory observations,

lIdentify impairment considerations of other non-financial

assets, and

lDetermine loan modification challenges under current

expected credit losses (CECL).

2–2

outline outline outline outline outline

A. Pressure Can be Created by

i. Unintended consequences of sales

targets

ii. Loss of income

iii. Debt compliance

iv. Loss of customers even prior to

COVID

v. Unrealized asset accumulation

B. Opportunities Can Occur When

i. Accounting records need to be fixed

ii. Aggressive estimates are used

iii. Reporting units are intentionally

restructured

iv. Overdue impairment charges are

taken

v. Reporting units are engineered to

trigger impairment

C. Rationalization During an Economic

Downturn

i. I can’t afford a loss

ii. It is temporary – I will fix it after

COVID

iii. My family comes first – without

these aggressive actions I would be

furloughed or terminated

iv. Poor results are expected

v. Matching revenue with expenses is

not a priority

D. Pressures Executives Face

i. Financial reporting

ii. Meeting sales targets

iii. Loss of income

iv. Maintaining debt covenants

v. Staying in compliance with

agreements

vi. Meeting market expectations

vii.Keeping everyone employed

E. Opportunities to Manipulate Results

i. Making aggressive estimates

lShowing overstated valuations

ii. Having intentional restructuring

lTo avoid impairments

iii. Cleaning up prior accounting issues

iv. Showing ultra conservative

estimates

lTrying to engineer some income

in the future

I. COVID Environment Ripe for Fraud

Outline

CPAR/OCT. ‘20

2–3

outline outline outline outline outline

Outline (continued)

A. Impairment Categories Raising

Litigation Exposure

i. Forecasted optimistic cash flows

lEvaporated overnight

lInvestor funding based on a

better financial position

ii. Aggressive projections

lCoupled with stressful results

from the pandemic

B. How to Prevent a Litigation

i. Full disclosure is the best

prevention

ii. Open lines of communication with

your investors

C. Using the SEC as a Resource

i. Evaluate issues

ii. Open level of discussion with

registrants

D. Increase in the IPO Market

i. Capital going into public markets

lInstead of venture capital and

private equity

E. Impairment of Other Non-Financial

Assets

i. Asset grouping

lFixed assets, intangibles &

others

ii. Customer acquisition costs

iii. Forecasting the cash flows of those

asset groups

iv. Consistency of forecasting

lClear assumptions

F. Coordinating Between Business Areas

i. Ensure all scenarios are

incorporated

ii. Apply probability thresholds to each

one

iii. Provide appropriate fair value of a

given asset

III. Managing Impairment and Litigation

A. Risk Assessment Considerations

i. Culture of the organization

ii. Setting the right tone

iii. Ethical standards of the entity

“…it's really critical for the C suite

to think about the culture, and to

think about the tone that they're

setting because … employees from

top to bottom are under stress.”

— Chris Brown

B. Risk Assessment Challenges for

Auditors

i. Valuation

ii. Impairment

iii. Timing

C. Assets to Protect Against Theft

i. Intellectual property

D. CAMs & Inventory Observation

Challenges

i. Critical to observe on or around the

balance sheet date

ii. Challenges on the audit approach

iii. Needs to be highlighted as a CAM

II. Risk Assessment and Protecting Assets

2–4

outline outline outline outline outline

Outline (continued)

A. Considerations Prior to Loan

Modification

i. Impact on incurred losses that

results from changes in credit risk

related to

lBorrowers for which

modifications may occur

B. CARES Act Section 4013

i. Provides financial institutions

temporary relief from TDR

accounting and disclosure

requirements

C. Agencies Statement

i. Short-term loan modifications made

in good faith are not TDRs

D. CECL Methodology on Loans

i. Report in net income

ii. Amount necessary to adjust the

allowance for credit losses

iii. For financial assets over their

contractual term

E. Challenges for CECL

i. Difference of economic conditions

in forecast

ii. Entities will have to adapt &

change initial scenarios

lTo adverse scenarios

iii. Figuring out the real forecast

iv. Embed that into their estimates for

loan losses over the lifetime of their

portfolio

IV. Loan Risk and Credit Losses in the Time of COVID

A. COVID-19 Effects on Disclosures

i. Going concern

ii. Subsequent events

iii. Risk and uncertainties

iv. Additional disclosure requirements

for filers

B. Going Concern Examples of Events

i. Negative financial trends

ii. Other indications of possible

financial difficulties

C. Going Concern Analysis

i. Used to be the purview of auditors

lManagement was going along

ii. FASB shifted the responsibility to

management

lAssessing their own going

concern

D. Struggles Companies Face

i. With respect to going concern

lCash position

lConsistent projections

lForming a conclusion regarding

going concern

lDetermine if a plan is needed

E. Other Reporting Considerations

i. Executive compensation

ii. Subsequent events

lSeparating recognition of a

subsequent event

lLook at facts and circumstances

iii. Non-GAAP measures

iv. Being precise in how the impact of

COVID-19 is addressed in a non-

GAAP measure

F. Bankruptcy & Executive Bonuses

i. Reward for the stress and effort to

make the turnaround happen

ii. Compensation gets questions if

things don’t work out

V. Going Concern and Reporting Issues

CPAR/OCT. ‘20

2–5

outline outline outline outline outline

Outline (continued)

A. Todd Rahn’s Final Thoughts

i. Communication is key

ii. Avoid surprises with advanced

reporting

iii. Ensure proper reporting

iv. Give early warning on impairments

v. Discuss with your auditor going

concern

vi. Put emphasis on robust disclosures

vii.Be transparent with your employees

B. Chris Brown’s Final Thoughts

i. Challenging times call for

exponentially greater pressures on

management

ii. Financial professionals involved in

critical valuations, impairment and

fair value to

lDocument assumptions

lHave adequate support

VI.Advice Looking Forward

2–6

1. What types of pressures, opportunities,

and rationalizations are executives faced

with, especially during the pandemic?

What types of pressures is your

organization facing during the pandemic?

2. What challenges are companies and

auditors facing right now? What audit

challenges has the pandemic created in

your organization?

3. What are some impairment

considerations for other nonfinancial

assets?

4. What loan modification considerations

have resulted from the pandemic?

5. What impact does CECL (current

expected credit losses) have on the

assessment of impairment of financial

assets? What challenges has your

organization faced when adopting CECL?

discussion questions discussion questions

2. COVID-19: Are Your Financial Statements Infected? – Part II

lAs the Discussion Leader, you should

introduce this video segment with words

similar to the following:

“In this segment, Todd Rahn and Chris

Brown discuss pressures, incentives and

opportunities to commit financial reporting

fraud that should be considered in an

entity's risk assessment from a corporate

perspective.”

lShow Segment 2. The transcript of this

video starts on page 2–19 of this guide.

lAfter playing the video, use the questions

provided or ones you have developed to

generate discussion. The answers to our

discussion questions are on pages 2–8 to

2–10. Additional objective questions are

on pages 2–11 and 2–12.

lAfter the discussion, complete the

evaluation form on page A–1.

Discussion Questions

You may want to assign these discussion questions to individual participants before viewing

the video segment.

Instructions for Segment

Group Live Option

For additional information concerning CPE requirements, see page vi of this guide.

CPAR/OCT. ‘20

2–7

6. What disclosures should an organization

include on the current and future effects

of COVID-19 and what struggles are

companies facing with respect to going

concern? How do your organization’s

disclosures enable an investor to

understand how management is

analyzing the impact of COVID-19 on

the company’s operations and financial

condition?

7. What are some other reporting

considerations in light of the COVID-19

pandemic? What other reporting

considerations will your organization

include in its financial statements?

discussion questions discussion questions

Discussion Questions (continued)

2–82–82–8

1. What types of pressures, opportunities,

and rationalizations are executives faced

with, especially during the pandemic?

What types of pressures is your

organization facing during the pandemic?

lPressure can be created by

lUnintended consequences of sales

targets and/or incentives

lLoss of income that would entail

financial hardships

lLoss of company revenue may

mean a company cannot meet its

obligations

lDebt compliance

lSalespeople losing customers even

prior to COVID-19

lCompanies accumulating

unrealizable assets

lStaying in compliance with

agreements

lTrying to keep everyone employed

lOpportunities can arise when

lAccounting records need to be

fixed or “cleaned up”

lAggressive estimates are made to

prevent impairments and going

concern disclosures

lShowing overstated valuations

lReporting units are intentionally

restructured solely to prevent

impairment

lOverdue impairment charges are

taken

lReporting units are engineered to

trigger current period impairment

to prevent drag of future

impairment charges

lHaving intentional restructuring

lTo avoid impairments

lCleaning up prior to accounting

issues

lShowing ultra conservative

estimates

lTrying to engineer some income

in the future

lRationalization

l“I can’t afford to show a loss”

l“This is temporary, I will fix it

after COVID”

l“My family comes first – without

these aggressive actions I would be

furloughed or terminated”

l“The market doesn’t expect us to

have a good quarter anyway”

l“What difference does it make if I

put an expense in the wrong period

right now”

lParticipant response based on

personal/organizational experience

2. What challenges are companies and

auditors facing right now? What audit

challenges has the pandemic created in

your organization?

lPhysical inventories

lAuditors trying to figure out how

to deal with the remote

environment

lCompanies facing the same

challenges

lProtecting Assets

lMassive incentives for fraud

lIntellectual property that is easy to

take and sell

lFinancial statement fraud

lTo make the company look good or

make a problem go away

lCritical audit matters (CAMs)

lA need to report considerations

related to audit procedures driven

by the pandemic

lInventory and fixed asset observation

challenges

lCritical to observe on or around the

balance sheet date

lChallenges on the audit approach

lNeeds to be highlighted as a CAM

lParticipant response based on

personal/organizational experience

suggested answers to discussion questions

Suggested Answers to Discussion Questions

2. COVID-19: Are Your Financial Statements Infected? – Part II

CPAR/OCT. ‘20

2–9

3. What are some impairment

considerations for other nonfinancial

assets?

lAsset grouping

lFixed assets, intangibles, and

others

lCustomer acquisition costs

lThe lowest level of identifiable

cash flows for a particular asset

grouping

lForecasting the cash flows of those

asset groups

lConsistency of forecasting

lMake clear what the assumptions

are and what the need for having

different paths is

lRequires close coordination between

accounting and finance personnel

lEnsure all scenarios are

incorporated

lApply probability thresholds to

each one

lProvide appropriate fair value of

a given asset

4. What loan modification considerations

have resulted from the pandemic?

lConsiderations prior to loan

modification

lImpact on incurred losses that

results from changes in credit risk

related to borrowers for which

modifications may occur

lCARES Act gives financial

institutions temporary relief from the

TDR accounting and disclosure

requirements for certain loan

modifications that are made in

response to the COVID-19 pandemic

lVarious federal and state agencies

issued a statement which provides

that short-term loan modifications

made in good faith are not TDRs

5. What impact does CECL (current

expected credit losses) have on the

assessment of impairment of financial

assets? What challenges has your

organization faced when adopting

CECL?

lUnder the CECL methodology an

entity should:

lReport in net income (as a credit

loss expense)

lThe amount necessary to adjust

the allowance for credit losses

lFor financial assets over their

contractual term

lDifference of economic conditions in

the forecast

lThe economic conditions in the

forecast at the beginning of the

year were completely different

than the current conditions

lIt did not contemplate what was

going to happen

lEntities have been able to pivot and

adapt by changing the scenario they

had built into their original

projections

lPush to a more adverse scenario

lAccountants will need to figure out

what the real forecast is going to be

lNeed to embed the real forecast into

their estimates for loan losses over

the lifetime of their portfolio

lParticipant response based on

personal/organizational experience

suggested answers to discussion questions

Suggested Answers to Discussion Questions (continued)

2–10

6. What disclosures should an organization

include on the current and future effects

of COVID-19 and what struggles are

companies facing with respect to going

concern? How do your organization’s

disclosures enable an investor to

understand how management is

analyzing the impact of COVID-19 on

the company’s operations and financial

condition?

lGoing concern under Subtopic

205-40

lNegative financial trends

lOther indications of possible

financial difficulties

lSubsequent events under Topic 855

lRisk and uncertainties under Topic

275

lUnusual items under Subtopic 220-

lAdditional disclosure requirements

for filers under CF Disclosure

Guidance

Topic 9A

lGoing concern struggles

lCash position

lConsistent projections

lLook at the next 12 months

lForming a conclusion regarding

going concern

lDetermine if a plan is needed

lMake sure accounting personnel

and the company are highlighting

the conclusion and plan

lCoordinate the conclusion and

plan with the auditor

lParticipant response based on

personal/organizational experience

7. What are some other reporting

considerations in light of the COVID-19

pandemic? What other reporting

considerations will your organization

include in its financial statements?

lExecutive compensation

lTiming of stock grants

lVolatile economy and unclear

performance conditions

-Subsequent events

lSeparating recognition of a

subsequent event

lWhat are the facts and

circumstances that drove the

event

lDid it exist at the balance sheet

date

lNon-GAAP measures

lBeing precise in how the impact of

COVID-19 is addressed in a non-

GAAP measure

lShould be done in a way that is

not misleading

lParticipant response based on

personal/organizational experience

suggested answers to discussion questions

Suggested Answers to Discussion Questions (continued)

CPAR/OCT. ‘20

2–112–11

objective questions objective questions

1. An opportunity to create fraud,

especially during the pandemic is:

a) unintended consequences of sales

targets

b) debt compliance

c) intentional restructuring to avoid

impairments

d) loss of customers

2. It is critical to observe inventory:

a) at the time its value is highest

b) on or around the balance sheet date

c) within the last quarter of the year

d) on a weekend or holiday

3. Which of the following is an impairment

consideration of other nonfinancial

assets?

a) asset grouping

b) forecasting net realizable value

c) cash balancing

d) assessing risk

4. Loans are being modified as a result of

COVID-19. Which modification would

likely be considered a troubled debt

restructuring?

a) a borrower is allowed to defer

payments for three months

b) the lender has waived its fees for six

months

c) payment terms have been extended

five months for a borrower

d) the lender reduced the interest rate

and extended payment terms for 5

years

5. Struggles companies face with respect to

going concern include looking at:

a) current cash position

b) the quarterly cycle

c) the next 12 months

d) years ahead

6. A challenge with subsequent events is:

a) separating recognition

b) whether an event occurred

c) determining the rules

d) creating scenarios

7. Impairment tests on depreciated assets

should occur:

a) at every year-end

b) ideally around the same time every

year

c) if the replacement cost is less than

the original cost

d) when a triggering event suggests that

assets may be impaired

8. Non-recurring fair value disclosures

include:

a) information about any transfers

between Level 1 and Level 2 of the

fair value hierarchy

b) fair value measurement changes

during the period and the reasons for

the changes, such as impairment

c) the Level 3 rollforward of the

opening balances to the closing

balance for Level 3

measurements

d) a narrative description of the

sensitivity of Level 3 fair value

measurements to changes in

unobservable input

You may want to use these objective questions to test knowledge and/or to generate further discussion;

these questions are only for group live purposes. Most of these questions are based on the video

segment, a few may be based on the reading for self-study that starts on page 2–13.

Objective Questions

2. COVID-19: Are Your Financial Statements Infected? – Part II

2–11

2–12

objective questions objective questions

9. Which of the following is true regarding

testing goodwill for impairment?

a) a qualitative test is required to be

performed before the quantitative test

b) a triggering event must occur before

a goodwill impairment test is

required

c) one of the key factors in performing

the test is identifying the reporting

unit to which goodwill relates

d) all assets other than goodwill that

may need a write-down for

impairment should be tested after the

goodwill impairment test

10. Goodwill is tested for impairment:

a) annually, at a consistent point in the

fiscal year

b) at least annually, at any time during

the year

c) only when a triggering event occurs

d) when a business is acquired

Objective Questions (continued)

CPAR/OCT. ‘20

2–13

Self-Study Option

Reading (Optional for Group Study)

FAIR VALUE FUNDAMENTALS – ASSET IMPAIRMENTS

AND BUSINESS COMBINATIONS (FVFA4)

Accounting Continuing Education

Kaplan – Mark D. Mishler, MBA, CPA,

CMA

Fair Value (ASC Topic 820)

and Impairments (ASC

Topics 350 and 360)

LEARNING OBJECTIVES

At the conclusion of this section,

participants will be able to understand:

lHow GAAP fair value guidance applies

to asset impairment for ASC Topic 350

– Intangibles

lHow GAAP fair value guidance applies

to asset impairment for ASC Topic 360

– Property, Plant, and Equipment

INTRODUCTION

Fair value applies to nonfinancial assets

when they are impaired. In these cases, fair

value measurement is nonrecurring, being

applied only at the impairment date.

The approach used for asset impairments in

ASC Topic 350 – Intangibles, and ASC

Topic 360 – Property, depends on whether

or not the assets are depreciated or

amortized.

lPerform impairment tests on depreciated

(or amortized) assets that are held and

used only upon the occurrence of

triggering events that suggest the assets

may be impaired. When performed, the

tests are “cash-flow based” because

impairment exists when carrying values

exceed undiscounted cash flows

expected from those assets during their

remaining economic life.

This approach is appropriate for both

fixed assets and definite-lived

intangibles. It makes sense that

impairment is addressed only when

there are adverse events because these

assets’ carrying values already decline

as they are depreciated or amortized.

lGoodwill and indefinite-lived

intangibles are not amortized, so their

original cost remains on the balance

sheet indefinitely. As a result, value

impairment is of greater concern over

time, and ASC Topic 350 requires that

impairment possibility be addressed at

least annually (more often if there are

triggering events).

reading reading reading reading

lIn order to ensure adherence to

NASBA guidelines regarding self-

study, the CPA Report and CPA Report

Government/Not-for-Profit Self-Study

Professional Education Centers are no

longer available. Customers should

contact their company administrators

for information on taking course exams

and receiving CPE credit for the

courses.

lCustomers may contact Kaplan

Financial Education at

cpesupport@kaplan.com to obtain

certificates previously earned through

the CPA Report Self-Study and CPA

Report Government/Not-for-Profit Self-

Study Professional Education Centers.

lCustomers interested in the self-study

format of the CPA Report can find

information on Kaplan Financial

Education's self-study libraries at

Online Accounting CPE Courses.

CPA Report Update

2–14

lA simplified alternative approach for

goodwill is now available to nonpublic

entities since the issuance of ASU 2014-

02. This alternative results in goodwill

being amortized and tested for

impairment only when there are

triggering events. This ASU is discussed

in detail in this section.

Property, plant, and equipment classified as

held-for-sale is a special case. When these

assets become classified as held for sale, an

impairment loss is required if their carrying

values exceed expected net proceeds from

the sale (“fair value less costs to sell”).

These write-downs are the only ones that

may not be permanent; recovery in value is

allowed to be recorded. The common thread

here is that impaired long-term assets are

carried at fair value. The discussion below

covers the following topics: Testing

goodwill for impairment, including the PCC

alternative in ASU 2014-02, and a new

simplified impairment test in ASU 2017-04

Testing other indefinite-lived intangibles for

impairment Impairments of other long-term

assets – property and amortized intangibles

Some of the most common applications of

nonrecurring fair values include:

Assets – Certain nonfinancial assets are

carried at cost unless, as a result of

impairment, they must be written down to

fair value. Generally, the write-down is

permanent, and the fair value is treated as

the “new” cost basis going forward (i.e., not

repeatedly marked to market) – unless the

asset becomes even further impaired. For

assets used in the business, such as property

and equipment, possible impairment is not

monitored continuously; rather, certain

events and circumstances will trigger an

impairment test. This approach is also used

for intangible assets with definite lives, i.e.,

those that are amortized. Assets held for sale

are carried at the lower of cost or fair value

less costs to sell. Any write-down will occur

upon classification as “held for sale.” This

classification is intentionally restrictive, as it

is prone to abuse because depreciation is not

recorded on assets held for sale. Often,

assets held for sale are related to either a

discontinued operation or a business

combination where the buyer intends to

immediately sell off some of the acquired

assets. Intangible assets with indefinite lives

– most notably (but not limited to) goodwill

– are required to be monitored continuously

for possible impairment. Practically

speaking, these assets are of greater concern

because they remain on the books

indefinitely.

Liabilities – Certain liabilities are required

to be recorded initially at fair value. The

most common examples are probably

guarantees and asset retirement obligations.

Fair values for liabilities such as these are

generally based on an estimate of future

cash flows (Level 3) due to the absence of

any market for them.

Business Combinations – All assets and

liabilities acquired must be initially

measured at fair value. This is perhaps the

most comprehensive application of

nonrecurring fair values because many

assets and liabilities recorded in business

combinations relate to items not reported on

the acquiree’s balance sheet. In subsequent

periods, amounts recorded are not marked to

market unless the nature of the account is

subject to recurring fair value rules.

Some Useful Generalities

lNonrecurring fair values tend to be the

most challenging to measure because the

assets and liabilities involved are not

traded in an active market. Usually,

appraisals, cash flow projections, and

similar subjective techniques must be

used.

lNonrecurring fair values are handled

separately from recurring fair values in

ASC Topic 820 disclosure rules.

However, because these fair value

measurements result from other events

such as impairment, discontinued

operations, or a business acquisition,

there are many more required

disclosures beyond those for fair value.

Care is needed to ensure that all

necessary disclosures are provided.

lAssets that must be measured at fair

value if they are impaired must first

undergo an impairment test; the test may

conclude that the assets are not impaired

and should remain at their previous

values—making their fair values

irrelevant.

2–14

reading reading reading reading

CPAR/OCT. ‘20

2–15

reading reading reading reading

lAs mentioned earlier, there is no general

requirement to report property, notes

payable, and other nonfinancial assets

and liabilities at fair value. ASC Topic

820 prescribes how to determine fair

value without widening its scope.

Non-Recurring Fair Value

Disclosures

The reporting entity must disclose

information that enables users of the

financial statements to assess the valuation

techniques and the inputs used to develop

these measurements. For assets and

liabilities that are measured at fair value on

a nonrecurring basis, annual and interim

disclosures must include for each major

class of assets and liabilities the following

information on the inputs used to develop

the values after initial recognition:

1. Fair value measurement changes during

the period and the reasons for the changes,

such as impairment. Nonrecurring fair value

measurements are those that other Topics

require or permit in the balance sheet in

particular circumstances. Examples are asset

impairment and measuring a long lived asset

or disposal group classified as held-for-sale

at fair value less costs to sell in accordance

with ASC Topic 360 because the asset’s fair

value less costs to sell is lower than its

carrying amount. In such situations, fair

value measurement is required by other

Topics. For nonrecurring fair value

measurements at a date that is not the end of

the reporting period, a reporting entity

discloses this fact as well as the intra-period

measurement date. An example is a calendar

year-end public company is reporting its

Form 10-Q for the second quarter and had

taken an impairment charge on a long-lived

asset during the first quarter. The level in

the hierarchy is applicable to each

nonrecurring fair value measurement.

2. For fair value measurements in Levels

2 and 3, a description of the valuation

techniques and inputs used. If there has

been a change in either, disclose the change

along with reasons why. Examples are

changing from matrix pricing to the

binomial model or using an additional

valuation technique. Note that GAAP

permits some exceptions when quantitative

information about inputs would cause

proprietary information to be disclosed by a

nonpublic entity. For example, if a private

company records a goodwill impairment

based on a business valuation, it would be

exempt from disclosing proprietary

information used as inputs in the valuation.

3. For Level 3 measurements, a

description of the inputs and the information

used to develop the significant unobservable

inputs.

4. For fair value measurements using

significant unobservable inputs (Level 3), a

description of the valuation processes used.

An example is how a reporting entity

decides its valuation policies and procedures

and analyzes changes in fair value

measurements from period to period.

5. If the highest and best use of a

nonfinancial asset differs from its current

use, disclose this fact and the reasons why.

The following disclosure requirements do

not apply to nonrecurring fair value

measurements:

lInformation about any transfers between

Level 1 and Level 2 of the fair value

hierarchy

lThe Level 3 rollforward of the opening

balances to the closing balances for

Level 3 measurements

lA narrative description of the sensitivity

of Level 3 fair value measurements to

changes in unobservable input

TESTING GOODWILL FOR

IMPAIRMENT

Background and Overview

The material that follows covers:

The original 2-step impairment test The

simplified 1-step impairment test in ASU

2017-04 ASU 2011-08, which introduced

the option of performing a qualitative

analysis up front, possibly removing the

need for the 2-step test ASU 2014-02, which

simplifies goodwill accounting for

nonpublic entities by treating it as an

amortizable intangible asset

2–16

The Original 2-Step Test

The traditional 2-step quantitative test for

impairment of goodwill is:

lStep 1: Compare the fair value of the

reporting unit to its carrying value

(including goodwill). If the fair value is

greater, goodwill is not impaired. If the

carrying value is greater, go to Step 2.

lStep 2: Determine the implied value of

goodwill by comparing the fair value of

the reporting unit to the fair value of its

assets and liabilities without goodwill.

Any excess of the carrying value of

goodwill over the implied value of

goodwill is the amount of impairment.

This step equates to calculating the

amount of goodwill that would be

recorded if the reporting unit were

purchased now.

This test is required to be performed

annually, at a consistent point in the fiscal

year. If adverse events and circumstances

arise, the test may have to be performed at

other dates as well. (An illustrative list of

adverse events and circumstances to

consider are included in ASU 2011-08.)

The key factors in performing this test are

(a) identifying the reporting unit to which

the goodwill relates, and (b) knowing the

value of the reporting unit, which usually

necessitates having a business valuation

performed. Further, if Step 2 is performed,

the valuation must also provide the fair

values of all the identifiable assets and

liabilities without goodwill. (The latter

really goes beyond a typical business

valuation.)

Further, because most private companies

record the accounts of an acquiree on its

own books, the ability to identify the

acquiree as a separate entity in subsequent

periods is lost. As a result, the reporting unit

concept is, by necessity, applied to the

company as a whole.

All assets other than goodwill that may

need a write-down for impairment should

be “tested” first. This causes the goodwill

impairment loss to be less likely because

the carrying value of the reporting unit is

lower.

The following example illustrates the

mechanics of the 2-step test.

Election to Perform a Qualitative

Analysis

ASU 2011-08 was issued primarily to

address concerns of private entities over the

cost and complexity of applying the

impairment test described above. The

intended result was to simplify goodwill

impairment testing by allowing entities to

first evaluate qualitative events and

circumstances to conclude whether it is

more likely than not (“MLTN”) the

reading reading reading reading

CPAR/OCT. ‘20

2–17

reading reading reading reading

reporting unit’s carrying value exceeds its

fair value.

If this qualitative assessment results in a

conclusion that it is not MLTN, the two-step

impairment test based on quantitative data is

not required. This approach is an option

rather than a requirement and may be used

in some periods but not others. An entity can

always choose to go directly to the two-step

test, and thereby forego performing this

qualitative analysis (which is now

sometimes referred to as “Step 0” of the

goodwill impairment test). Conversely,

when the two-step test is employed, the

qualitative analysis introduced in this ASU

need not also be performed.

Although the objective is simplification,

applying the provisions requires an

extraordinary degree of subjective judgment

in order to reach a conclusion that, in the

end, is supportable, documented, defensible,

and in many cases, auditable. The standard

is actually a trade-off between quantitative

analysis that is complex and expensive to

apply and qualitative analysis that must be

robust enough to 143 withstand scrutiny.

Consequently, it is not the “silver bullet”

many private companies were hoping for.

Rather than prescribe a methodology or

“bright line” cutoffs for the qualitative

analysis, it provides a list of potential

adverse events and circumstances that

should be considered to assess the likelihood

that the carrying value of a reporting unit

exceeds its fair value and then describes in

general terms how they should be weighted

in terms of their significance, combined with

factual data from prior periods or any other

relevant data, and examined in conjunction

with positive or mitigating factors to form a

MLTN conclusion.

In addition to the option of performing a

qualitative analysis, there are several related

issues:

lThere is no change to how goodwill is

assigned to reporting units, nor is there a

change to the requirement to test

goodwill more than annually if adverse

“triggering” events and circumstances

are present.

lThere is a revised list of events and

circumstances that might trigger an

impairment test between annual testing

dates.

The option of carrying forward prior

year valuation data to perform the

current year impairment assessment is

removed.

lLevel 3 fair value disclosure

requirements are clarified in that they

are not required for inputs used in the

goodwill impairment analysis.

lThe method originally only applied to

goodwill; it does not apply to testing

other intangibles for impairment.

However, the FASB subsequently issued

ASU No. 2012-02, Testing Indefinite-

Lived Intangible Assets for Impairment,

which allows using a similar qualitative

assessment when testing indefinite-lived

intangible assets other than goodwill for

impairment.

lRevised List of Events and

Circumstances – The “linchpin” of this

standard is a list of events and

circumstances that are analyzed to

decide if it is MLTN that the fair value

of a reporting unit is less than its

carrying amount. As stated in the ASU,

the list is not intended to be all-

inclusive, and an entity should consider

both severity and mitigating factors in

determining whether the full impairment

test for goodwill is required.

The list consists of adverse factors that

suggest a reporting unit’s value may be

impaired:

lMacroeconomic factors – deterioration

in general economic conditions, access

to capital, or foreign exchange rates, or

other changes in equity and credit

markets

lIndustry/market factors – increased

competition, industry downturn, change

in the market for a company’s products

or services, decline in market-dependent

multiples or metrics affecting valuation,

adverse regulatory actions

2–18

reading reading reading reading

lCost factors – increased costs for

materials, labor, etc., that adversely

affect profitability or cash flows

lFinancial performance – negative or

declining cash flows, declines in actual

or projected revenue or earnings

compared with actual and projected

results for prior periods

lEntity-specific – changes in

management or key personnel, strategy,

or customer base; litigation;

consideration of filing for bankruptcy

lAssets – actual or contemplated major

disposals; significant asset classes tested

for impairment due to triggering events,

recognition of goodwill impairments in

subsidiaries of the reporting unit

lShare price – sustained decrease in share

price (on a standalone basis or in

relation to comparable companies)

None of these factors alone is “definite

proof” that Step 1 of the goodwill

impairment test must be performed. Rather,

a company considers each type of event and

circumstance, evaluates its relevance and

significance to the company, incorporates

mitigating factors, and reaches an overall

MLTN conclusion. Published materials

addressing this process emphasize the need

to document each component of the analysis

and provide reliable supporting quantitative

data.

This alternative did not prove popular with

the private companies it was meant to help.

Further, with the alternative now provided in

ASU 2014-02, its use is likely to be rare.

Therefore, detailed guidance on applying the

events and circumstance approach as well as

an illustrative template to document the

analysis are included in an Appendix to this

section.

TESTING INDEFINITE-LIVED

INTANGIBLE ASSETS OTHER

THAN GOODWILL FOR

IMPAIRMENT

Intangible assets other than goodwill that

may be indefinite-lived include:

lTrademarks and trade names

lLicenses (granted for the use of property

or a service)

lDistribution rights

Under ASC Section 350-30 (Intangibles –

Goodwill and Other > General Intangibles

Other than Goodwill), a reporting entity

must test indefinite-lived intangible assets

other than goodwill for impairment annually,

as well as any time adverse events or

circumstances indicate possible impairment.

The quantitative impairment test of ASC

Section 350-30 requires the entity to

determine the fair value of each indefinite-

lived intangible asset other than goodwill.

This is actually a one-step test, where

carrying values are compared to fair values.

If fair value is less, the asset is written down

to fair value.

ASU 2012-02 permits an election to first

assess qualitative factors in order to

determine whether it is more-likely-than-not

(MLTN) the indefinite-lived intangible asset

other than goodwill is impaired as a basis

for determining whether it is necessary to

perform the quantitative impairment test.

Consequently, similar to the goodwill option

discussed above, a reporting entity may elect

to assess qualitative factors based on events

or circumstances to conclude whether it is

MLTN that the asset is impaired, or just

perform the quantitative test comparing the

asset’s fair value to its fair value without

this qualitative assessment.

ASU 2012-02 has a list of relevant events

and circumstances to be considered both

individually and in the aggregate and

including adverse, positive, and mitigating

events and circumstances. They include:

lCost factors

lFinancial performance

lLegal, regulatory, contractual, political,

business, or other factors (including

asset-specific factors)

lOther relevant entity-specific events

lMacroeconomic conditions

CPAR/OCT. ‘20

2–19

reading reading reading reading

lIndustry and market consideration

Note that the preceding examples are not

all-inclusive. An entity using the qualitative

approach must also consider the following

to determine whether it is MLTN that an

indefinite-lived intangible asset is impaired:

lIf the entity has made a recent fair value

calculation for the indefinite-lived

intangible asset, the difference between

that fair value and the carrying amount

lWhether there have been any changes to

the carrying amount of the indefinite-

lived intangible asset

TESTING OTHER ASSETS

FOR IMPAIRMENT

Introduction

The practice of recording long-lived assets

at historical cost assumes their use will

provide future benefits at least as great as

their carrying values.

The concept of writing down an impaired

asset to some value less than carrying value

is not new. Over the years, large companies

did record such write-downs for impaired

assets, but ASC Topic 360, Property, Plant,

and Equipment, provides authoritative

guidance intended to ensure that the related

measurement and reporting are consistent.

The guidance in ASC Topic 360 addresses

two separate (but similar) major areas:

1. Assets held and used, although

impaired

2. Assets held for sale, which may or may

not be connected with discontinued

operations

The impairment rules in ASC Section 360-

10-35 generally apply to all entities,

including not-forprofits, with specified

exceptions that include:

lSpecialize financial instruments, and

certain intangibles of financial

institutions

Note that the methodology in ASC Section

360-10-35 also applies to finite-lived (i.e.,

amortizable) intangible assets.

Definite-lived assets are reviewed for

impairment only when certain triggering

events occur that indicate their values are

likely to be impaired. Consequently, any

“test” for impairment is not a routine

evaluation performed annually or at each

balance sheet date, but one “triggered” by

events such as:

lSignificant decrease in the market value

of an asset

lSignificant change in the way an asset is

to be used

lSignificant changes in the business or

legal environment

lSignificant cost overruns incurred for

self-constructed assets

lContinued (or anticipated) operating

losses and/or cash flow deficiencies

associated with identifiable assets

lA current expectation that it is MLTN

the asset will be sold or otherwise

disposed of before the end of its useful

life.

2–202–202–20

video transcript video transcript

Video Transcript

SURRAN: COVID-19 imposed certain pressures on C-suite executives and has

created an environment that is ripe for fraudulent activity. Pressure is one

of the three legs in the fraud triangle model that can lead someone to

commit fraud, along with perceived opportunity and rationalization. It's

easy to talk in general terms about pressure, opportunity and

rationalization, but how does each one surface in day-to-day operations

especially during the pandemic?

Pressure can be created by

lUnintended consequences of sales targets and/or incentives

lLoss of income that would entail financial hardships on a company;

level loss of revenue may mean a company can't meet its obligations

lDebt compliance

lSalespeople losing customers even prior to COVID

lCompanies accumulating unrealizable assets – this is the perfect time

to expense them and clean-up the balance sheet

An opportunity can surface at times when

lAccounting records need to be fixed or "cleaned up"

lAggressive estimates are made to prevent impairments and going

concern disclosures

lReporting units are intentionally restructured solely to prevent

impairment

lOverdue impairment charges are taken

lReporting units are engineered to trigger current period impairment to

prevent drag of future impairment charges

Rationalization may be the easiest of all, especially during an economic

downturn.

l"I can't afford to show a loss right now"

l"This is temporary, I will fix it after COVID"

l"My family comes first – without these aggressive actions I would be

furloughed or terminated"

l"The market doesn't expect us to have a good quarter anyway"

l"What difference does it make if I put an expense in the wrong period

right now?"

WILLIAMS: We continue our segment with Chris Brown, senior managing director at

FTI Consulting, discussing the related pressures, incentives and

opportunities to commit financial reporting fraud that should be

considered in an entity's Risk Assessment from a corporate perspective.

BROWN: The pressures right now I think are unprecedented. Especially when you

think about the C suite and those responsible for governance, including

clear and transparent financial reporting. Meeting sales targets in this

current environment, loss of income could result in immediate financial

2. COVID-19: Are Your Financial Statements Infected? – Part II

CPAR/OCT. ‘20

2–21

hardship, both for the entity and at a personal level. Maintaining debt

covenants and trying to stay in compliance with agreements that were

written that really didn't contemplate an environment like we have that's

so widespread are another one, as well as market expectations and just

trying to keep everyone employed.

So, thinking about what the C suite is thinking, it's trying to keep

everyone employed, trying to do the best for your business but balance

out the stakeholders and your shareholders because that's who you have a

fiduciary responsibility to.

There are a number of opportunities in this environment to avoid issues,

so you can go through and make aggressive estimates to show valuations

that may be overstated. You could do intentional restructuring to reporting

units solely to avoid impairments, and the SEC has seen that and

hopefully that's not being contemplated, but that is certainly an

opportunity. And then cleaning up prior accounting issues, we see this

often when the C suite turns over.

The first thing the new guys do is they'll come in and they'll look through,

and they'll have a different strategy and now you've got a bath being

taken. Again, in this environment where you've got so much change those

are opportunities and the risks that every entity should be considering.

And it can go the other way. You can get into a situation where you start

to have ultra conservative estimates, so that basically you're trying to

engineer some income down the road. You can take advantage of market

opportunities to do that, but certainly you need to keep and maintain

internal controls and have a consistent methodology that you approach

and document the assumptions that you're taking when you have a

business that takes a turn.

BROWN: From a risk assessment perspective, I think it's really critical for the C

suite to think about the culture, and to think about the tone that they're

setting because it's a natural environment where employees from top to

bottom are under stress.

So, even if they're not being directed, there could be people in middle

management that just, hey, I can help my company if I just take my

estimate and make it a little more aggressive here. I think I can support it.

You really want to make sure that the tone at the top is directing people to

do the right thing, follow the ethical standards of the entity, and that tone

needs to be demonstrated and emulated probably in this environment, just

I would say screaming from the mountain tops, really needs to be clear to

everyone.

WILLIAMS: Risk assessment is considered the foundation of an audit. It is the way

auditors obtain an understanding of the company and its environment to

identify and assess the risks of material misstatement of the financial

statements and plan the audit procedures to be performed accordingly.

Chris continues by giving us his insights from the auditors' perspective.

BROWN: From the auditor perspective, there's some unique challenges that are

happening right now. I read a Wall Street Journal article a few days ago

that talked about the challenges the audit firms are having of doing

physical inventories. So, you can imagine if the auditors are trying to

figure out how to do that, and then deal with the remote environment, and

then compounding that with the companies facing the same challenges,

you have a lot of risk for things being moved around, or hidden, or what

have you. From an auditor's perspective I think it's narrower because

video transcript video transcript

2–22

video transcript video transcript

they're going to be focused on risk assessments from a financial reporting

perspective.

And I think you'd have kind of the same ones that we'd always think of,

just maybe on steroids. Like valuation risk, impairment risk, and then of

course the big question as always is timing. Why now, why not before,

why not in the future?

From a management perspective, the risk assessment needs to be broader

than financial reporting, it needs to include operational and regulatory

risks that are all exacerbated in this environment. So it's tough because

there's more distractions than ever, but taking your eye off the ball of this

particular topic can really be troublesome and damage a company.

WILLIAMS: Todd Rahn, senior managing director and lead of accounting advisory

practice on the west coast, from FTI Consulting gives us his perspective.

RAHN: I do think about the fraud triangle, and in particular related to the

incentive, which Chris touched on there. Both related to frankly

protecting assets, but also financial reporting fraud. I've seen recent

statistics that upwards of 50% of people in this country right now, in the

US, don't have sufficient access to food. These are massive incentives,

massive issues that are hitting everybody that's working at any company

right now in this country.

The important thing is that again, like Chris said, like shouting from the

rooftops what the culture is all about, that is critical. And also making

sure that the back part of that process is Graphic 207 really closely

focused on and spending a lot of time, frankly, analyzing things related to

shrink, theft, any particular IP. For example, if there's computer

technology that we all know that is frankly, has huge amounts of value in

the current environment, are there any aspects of intellectual property

residing at companies that might be easy for someone to take and sell in

any way, shape, or form. These considerations are being more and more

focused, and frankly, problem areas for companies. Not to mention the

fact that yes, in addition to that, the incentive for financial reporting fraud

because someone wants to make themselves look good, or just make a

problem go away are clearly big issues.

WILLIAMS: A new requirement for auditors is to report on Critical Audit Matters,

known as CAMs. In 2019, PCAOB selected 12 audits of large accelerated

filers with fiscal years ending on or after June 30, 2019, to specifically

review how auditors of these filers implemented the CAM requirements.

The second effective date, which impacts audits of all other companies to

which the CAM requirements apply, is for audits of fiscal years ending on

or after December 15, 2020. Under PCAOB AS 3101, auditors are

required to identify material accounts that involve "challenging,

subjective, or complex auditor judgment" within their audit report and

explain why they consider the matter to be a CAM and how it was

addressed during the audit.

RAHN: One other thought too is that we all know that critical audit matters are

now getting reported for public companies and audit opinions. And

exactly this kind of issue will certainly create more focus on the need to

capture, report, along with obviously working with management and audit

committees, considerations related to procedures that the auditor has to do

that are driven by the pandemic. So, inventory is a great example, but

there's other things. They're related to fixed asset observations.

I mean, inventory's so critical because the need to be there on the balance

sheet date, at or around the balance sheet date, but there's lots of other

CPAR/OCT. ‘20

2–23

areas too where you think about the impact of the pandemic, the

challenges there, and the risks that relate to the audit approach and to the

auditor themselves. It's a great thought that those critical audit matters

are going to have to be highlighted and considered, and actually, the

PCAOB I'm sure, as well as the SEC are very focused on how

companies are going about addressing that, audit committee oversight,

and naturally of course from an independent audit perspective how the

independent auditor forms their view related to what critical audit

matters are and how those get described and reported.

WILLIAMS: Todd gives us his views on impairment categories he thinks raise the

most significant litigation exposure.

RAHN: It depends on the industry. We talked about some of the ones that are

really most at risk here, GIG economy, obviously brick and mortar

companies, some in the financial sector. Each one of these are going

through extensive assessments of impairments. And not to mention, by

the way, going through that having to deal with the underlying issue, of

how dramatically overnight the forecasted cash flows for these

companies has shifted. And that really to me is one of the key points be

it six months ago, had these really optimistic projections, putting even

the impairment considerations aside, and overnight those have

completely evaporated, that is going to create a situation where there's

just a lot of potential for litigation.

Because the investors obviously put their money in assuming that that

was going to continue, and it didn't.

Now, there are exceptions of course where there's just nothing that a

company could've done about it, but when they're being very aggressive

with those projections in the beginning and then you couple on top of it a

difficult situation, that's clearly where the stress is going to come out.

So again, it gets back to what can companies do to prevent that, it's

being as brutally honest as possible with disclosure. Great lines of

communication with your investor base, being very open about what's

going on within the company, and having a good dialogue about that.

And what management is doing to pivot and create value in the current

situation.

WILLIAMS: When in doubt, the SEC can help. The SEC has been very responsive

and a great resource to companies with any questions that have risen due

to the pandemic on various accounting treatments.

RAHN: The SEC for years has been very open to companies coming to them, but

certainly lately they're doing everything they can to make sure that they

provide resources to evaluate pre-clear issues, have an open level of

discussion with registrants to make sure that they're doing their part.

As I mentioned, an interesting dynamic of what's going on is that you're

seeing just what companies are doing well and what companies aren't,

and then you think about the impact that's having on the IPO market.

We've had a lot of companies that are going into that IPO pipeline, that

means there's capital that's going into public markets as opposed to as we

know for years there's been so much concentration of money in venture

capital and private equity. That's not going to go away, that continues to

be a huge channel for growth and continues to be an area of focus. But

that said, if you think of all these companies going public, that means the

SEC is going to be taking more of an active role and already is, in

video transcript video transcript

2–24

video transcript video transcript

ensuring that there's appropriate disclosure, and they obviously want to

keep an open line of communication with the investor base, with

companies, in order to have enough support from them on how to

interpret what's going on, and what reporting roles are applicable.

WILLIAMS: Todd discusses impairment considerations for other nonfinancial assets.

RAHN: In the course of this conversation we've touched on most of those. I

would say it goes back to one thing I just mentioned which relates to

forecasting. If you think about nonfinancial assets, underpinning those

are a couple things. And so we talked about reporting units in the context

of goodwill.

For other nonfinancial assets, it's all about asset grouping. And it's about

fixed assets, and intangibles, and others. Or it could be anything, it could

be customer acquisition costs, anything that's really sitting on the left-

hand side of the balance sheet, is what is the appropriate asset group,

meaning the lowest level of identifiable cash flows for a particular asset

grouping, which is a pretty low threshold.

And ensuring that they're grouped correctly, and then that the company is

dealing with those challenges, which I'm sure we're going to get to,

related to forecasting those cash flows, which almost feels like it's nearly

impossible in the current situation.

So, what does that mean? Well, it means that there has to be very close

coordination between the accounting and finance personnel,

Or other areas within the business that are looking at different scenarios,

that okay, if X, Y, Z happens that means we have to do A, B, C, and so

on. That is incorporated into scenarios, applying probability thresholds to

each one of those scenarios in order to ultimately provide the appropriate

answer around a fair value of a given asset.

WILLIAMS: Chris adds one more area for consideration.

BROWN: In addition to what Todd said, I think it'd be important to point out the

consistency of forecasting within an entity. So often in my days as an

audit partner, when I'd look at forecasts, there'd be three or four different

forecasts depending on what the use of it was. There'd be one looking at

deferred tax asset realization, then a different one for operational

purposes, and then maybe another one for goodwill.

That's always something that gets heavily scrutinized. So, you want to

make sure that the forecasting is consistent across the entity. And then to

the extent there's deviations where you're trying to forecast maybe more

adverse conditions or less adverse conditions, it's very clear what the

assumptions are, and what the need for having those different paths is.

SURRAN: Creditors that lend to entities that may be adversely affected by economic

instability resulting from the pandemic will need to assess whether

certain events (such as downgrades in borrower credit ratings or declines

in cash flows and liquidity) indicate that an impairment evaluation is

required. The economic uncertainty could also result in loan

modifications that must be accounted for as a troubled debt restructuring

(TDR) in accordance with ASC 310-40. For entities that have not yet

adopted ASC 326, a modification is not accounted for as a TDR before

the date the modification has occurred (i.e., a legally binding agreement

is in place).

CPAR/OCT. ‘20

2–25

video transcript video transcript

Nevertheless, even before the occurrence of such a modification, entities

should consider the impact on incurred losses that results from changes

in credit risk related to borrowers for which modifications may occur.

Section 4013 of the CARES Act gives financial institutions temporary

relief from the TDR accounting and disclosure requirements in ASC 310-

40 for certain loan modifications that are made in response to the

COVID-19 pandemic.

In addition, on March 22, 2020, various federal and state agencies ("the

agencies") issued an "Interagency Statement on Loan Modifications and

Reporting for Financial Institutions Working with Customers Affected by

the Coronavirus" ("the statement").

The statement provides the agencies' views on whether loans restructured

under creditors in response to COVID-19 are troubled debt restructurings

("TDRs") under ASC 310-40, Receivables – Troubled Debt Restructuring

by Creditors.

According to the statement,

"the agencies have confirmed with staff of the Financial Accounting

Standards Board (FASB) that short-term modifications made on a good

faith basis in response to Covid-19 to borrowers who were current prior

to any relief, are not TDRs.

This includes short-term (i.e. six months) modifications such as payment

deferrals, fee waivers, extensions of repayment terms, or other delays in

payment that are insignificant."

Under current expected credit losses (CECL) methodology, when it

comes to loans, an entity should report in net income (as a credit loss

expense) the amount necessary to adjust the allowance for credit losses

for management's current estimate of expected credit losses for financial

assets over their contractual term.

WILLIAMS: Chris Brown discusses the impact of CECL when it comes to assessment

of impairment of financial assets.

BROWN: Well, for those that have adopted CECL, it requires an estimate of

lifetime losses. It has all the risks inherent in normal valuations because

you have forecasting elements there. And then it has additional ones

because the standard allows you to revert back to historical, as the

forecast period goes on, you could have financial assets that could have

lives up to like 30 years, for example. You have a number of assumptions

and significant inputs that are even incremental to a normal complex

valuation that would be used in something like goodwill.

I think one of the big challenges for CECL is going to be when everyone

adopts at the beginning of this year, those that had to, the economic

conditions in the forecast were completely different. It didn't contemplate

what was going to happen. I think entities have been able to pivot and

adapt to that by changing kind of the scenario that they had built into

their original projections to push to a more adverse scenario. But

ultimately there's going to be a lot of tension around having to go back

and re-forecast and making sure, as I mentioned before, that your

forecasts within the entity are consistent with what you're doing with

CECL. So, I would expect a ton of work. The accountants are not going

to get a lot of sleep at the end of this year, as they go back and try to

figure out what the real forecast is going to be and embed that into their

estimates for loan losses over the lifetime of their portfolio.

2–26

video transcript video transcript

SURRAN: Under U.S. GAAP, financial statements are to include adequate

disclosures on the current and potential future effects of COVID-19. This

includes disclosures on going concern assumptions under Subtopic 205-

40 and subsequent events under Topic 855, as well as risks and

uncertainties under Topic 275 and unusual items under Subtopic 220-20.

There are additional disclosures required for filers under CF Disclosure

Guidance Topic 9A, issued by the SEC in late June 2020.

These disclosures should enable an investor to understand how

management and the board of directors are analyzing the current and

expected impact of COVID-19 on the company's operations and financial

condition, including liquidity and capital structure.

ASU 2014-15, Going Concern, codified as ASC 205-40, provides

guidance for determining when and how to disclose going concern

uncertainties in the financial statements. An entity is required to disclose

its inability to continue as a going concern when there is "substantial

doubt," which the standard defines as follows:

"Substantial doubt about an entity's ability to continue as a going concern

exists when conditions and events, considered in the aggregate, indicate

that it is probable that the entity will be unable to meet its obligations as

they become due within one year after the date that the financial

statements are issued (or within one year after the date that the financial

statements are available to be issued when applicable). The term probable

is used consistently with its use in Topic 450 on contingencies."

Entities are required to evaluate "relevant conditions and events that are

known and reasonably knowable at the date that the financial statements

are issued."

The standard provides two examples of events that suggest an entity may

be unable to meet its obligations:

(a) "Negative financial trends, for example, recurring operating losses,

working capital deficiencies, negative cash flows from operating

activities, and other adverse key financial ratios

(b) Other indications of possible financial difficulties, for example,

default on loans or similar agreements, arrearages in dividends, denial of

usual trade credit from suppliers, a need to restructure debt to avoid

default, noncompliance with statutory capital requirements, and a need to

seek new sources or methods of financing or to dispose of substantial

assets."

WILLIAMS: In addition to financial and non-financial asset impairment, Todd gives us

his thoughts on other reporting considerations that should be looked at

and evaluated by management and C-suite executives.

RAHN: Well, as we've touched on, it's been an unprecedented year, unprecedented

period with a humanitarian crisis like we've never seen and that's

impacting companies, frankly, in every single way. So, in addition to

impairments, the things that we're seeing that are getting more focus than

other areas right now that really haven't in the past are going concern,

restructuring debt modification, anything related to that, troubled debt

restructuring, or just modifications, et cetera. Then also just, M&A,

activity, just dealing with acquisitions, sales, that sort of thing. But I want

to draw out one in particular that is good for companies to note.

Frankly, some companies may not even be very conscious about this,

which is the going concern analysis. So, for decades, as we know, going

concern was the purview of the auditor.

CPAR/OCT. ‘20

2–27

video transcript video transcript

It was the classic tail wagging the dog where management's kind of

rolling along and the auditor just walks into their office one day and

says, "Hey, I don't think you're going to make it the next 12 months." I

mean, obviously it's not like that, but it was not something that the

company had to deal with in its own internal control environment.

Well, that's now changed as of a few years ago where the FASB's

incorporated in the U.S. GAAP, a requirement that companies must

assess its own going concern and come up to that conclusion. Now, the

rule is generally similar to what the auditor does, but there are

differences.

But the more important thing is that the companies know that, "Okay, I'm

not doing so hot and I've always had plenty of cash. I need to form my

own conclusion about what that going concern answer is and document it

and make sure that it's ready to be audited."

The key there, under that standard, is even if management concludes that

they have sufficient capital for the next 12 months, sometimes the reason

they conclude that is because there's plans that mitigate something that's

creating an initial substantial doubt in the first place. And if you're in that

bucket where you think you're going to make it, but you have some plans

that you're putting in place or are put in place that are addressing that

original going concern, then management has to make that disclosure

within its financial statements and obviously something that we're going

to see an increase in the months ahead.

WILLIAMS: But what are the areas that companies mostly struggle with when it

comes to going concern?

RAHN: Where I've seen companies struggle the most with the going concern is

exactly that issue that Chris mentioned of the projections, because

companies don't think in 12-month increments. And frankly, even though

accountants get all excited about the financial reporting date and the

year-end date, that's not something really that company is thinking about

on a regular basis.

They're thinking about if they're public, obviously the quarterly cycle,

but then they're also thinking longer term for years ahead and so, this is a

very specific accounting question that gets into the next 12 months, the

cash position of the company. Now, clearly, if this is a question in the

first place, no doubt it's top of mind for the CFO to be thinking about,

"Okay, what's my cash position?"

But they're not saying, "Oh gosh, I think I'm going to make it 11 and a

half months." They're just thinking about, "Okay, I know I need cash.

Here's the financing I got to get put in place."

Then when it comes to this evaluation and obviously things are tense

anyway, if you're having this conversation and you've got a standard in

the accounting rules that requires them to look at that 12 months, come

up with the projections, as Chris said, make them consistent with

everything else that you're talking about in your business, and then

forming that conclusion and distinguishing whether you need plans, it

becomes a lot more complicated than it actually might originally appear.

And so, the key is making sure that the accounting personnel and the

company are highlighting that early enough, so that it can be a well

thought out conversation. And then yes, it does need to be coordinated

with the auditor, although it's rare if ever that there's a disagreement

between the accountant and the auditor on the going concern conclusion.

2–28

video transcript video transcript

WILLIAMS: Chris continues with his thoughts on reporting considerations, other than

financial and non-financial asset impairment.

BROWN: Well, aside from the elephant in the room of impairment and going

concern, a few others I would touch on, first would be executive

compensation, so the timing of stock grants and a volatile economy and

the stock market is jumping up and down, could certainly be questioned

and so, we are looking at unclear performance conditions, modifications,

et cetera.

Another would be subsequent events. So, there are a lot of challenges

here now, separating recognition of a subsequent event. And looking,

what are the facts and circumstances that drove, whatever that event was,

did they exist at the balance sheet date?

It sounds easy when you read the rules, but there are some number of

scenarios that we see or we deal with that are really not so clear. With the

impact of something like COVID, I think that even is more challenging.

Then finally, maybe what I'd mention is non-GAAP measures and then

being precise in how do you assess the impact of COVID in a non-GAAP

measure?

I think there would be a natural inclination to say, but for COVID we

would have done X and carving that out and how you do that in a way

that's not going to be misleading or challenged is very intricate and

complex and you really need to be thoughtful if that's a path that you're

going to go down.

WILLIAMS: And yes, executive compensation and payments made to upper

management, when a company is on the verge of bankruptcy, have

certainly made the news. Some will ask why executives should be

rewarded for bringing their company into bankruptcy? So, how are those

amounts justified?

BROWN: I think it's a really difficult challenge. If you have an entity that's in

trouble and you're a board, and you're trying to find the right executives

to come in and turn the company around, to get the level of talent you

need, people are not going to step in with that level of talent without a

compensation package that's going to reward them for the stress and the

effort and the time away from their family to make the turnaround

happen.

The other edge of the sword is if it doesn't work out and it's not

successful, like we've seen in some of the bankruptcies, now the

compensation gets questioned and that's a very difficult thing to deal with

on the back end because the optics of it are not great. So, that's something

that boards need to think about and frankly, the C suite management also

needs to consider to try to strike a balance so that everyone understands

kind of the nature and why the compensation is what it is and hopefully

kind of maybe mitigate some of that scrutiny.

WILLIAMS: We end our segment with Todd Rahn's and Chris Brown's final thoughts.

RAHN: I would say we've covered a lot of ground on impairments, early

warnings, restructuring, step modifications, CECL, accounting standard

adoption. Stepping back from this for a minute, I think the key right here

is communication. The key is communication and that companies need to

be, even though it's so easy for all of us, we're sitting in our houses, the

good portion of the day, and we're just not interacting with each other as

CPAR/OCT. ‘20

2–29

video transcript video transcript

much anymore. It's so easy to not do that, not communicate and just kind

of assume that everything's going okay.

It's just that where issues arise with advanced reporting is surprises and

so, making sure be it related to executive comp packages and metrics

there, whether it's related to leasing and making sure that you're reporting

those correctly, making sure that those impairments, you're giving

enough of an early warning and talking about a situation. Going concern,

communication with your auditor.

I mean, on and on is putting an emphasis of making sure that disclosures

are robust, that it's a blank slate for public companies in particular, is that

in your filings, that you're being very open, you're rewriting the

handbook, you're rewriting what you have in your disclosures and being

very clear about what's going on in the business, that will pay off tenfold

in the future.

And obviously with your own people, with your employees, making sure

that you're being very clear with them and on the mission of the

businesses, staying focused on your people and making sure that they're

staying healthy and that they're focusing on their own wellbeing, but also

focusing on their jobs and ensuring that they're doing what they need to

be doing for the purposes of maintaining good internal controls over

financial reporting.

BROWN: Two points that I would leave everyone with. First there's no doubt this

environment is as challenging as we've faced in a long time and the

pressures on management are always high and now they're exponentially

greater and I think it's really important for them to not take the eye off

the ball relative to culture and setting the right tone from the top to the

bottom to the newest intern is really critical to make sure that these

pressures don't somehow invade their way into the financial reporting

process and the internal control process.

Secondarily, I think it's really important for those that are having to do

the work around these critical valuations, around impairments, around

fair value, to document the assumptions and really get good

documentation and support with the mindset of expecting that someone

is going to come in later with 2020 hindsight as to what happened and

they're going to challenge what you've done, so that thorough

documentation can really be the difference between what I would say, a

very simple review process or one that goes into litigation, regulatory

enforcement and so on. So, those two things I think combined, if you

keep those in mind are really going to help you get through this.

segment three segment three segment three

Segment Three

CPAR/OCT. ‘20

3–1

segment three segment three segment three

Deferral of Payroll Tax Obligations and More

Learning

Objectives:

Segment

Overview:

Field of Study:

Recommended

Accreditation:

Running Time:

Video

Transcript:

Course Level:

Course

Prerequisites:

Advance

Preparation:

Expiration Date:

Taxes

December 12, 2021

Work experience in tax planning or tax compliance, or an

introductory course in taxation.

None

1 hour group live

2 hours self-study online

Update

See page 3–19.

38 minutes

On August 8, 2020, the White House issued a “Memorandum on

Deferring Payroll Tax Obligations in Light of the Ongoing

COVID-19 Disaster” allowing deferral of the withholding, deposit,

and payment of the tax on wages or compensation paid during the

period of September 1, 2020 through December 31, 2020. Barbara

Weltman, president of Big Ideas for Small Business is giving us

some of the highlights of the presidential deferral pronouncement,

as well as the IRS developments on payroll-related matters.

Upon successful completion of this segment, you should be able to:

lIdentify the recent clarifications by the IRS on deferred

payroll taxes,

lRecognize the different tax implications of debt forgiveness

or debt modification,

lRecognize the IRS forms available for digital signature, and

lUnderstand the differences between the proposed and final

regulations for the quid pro quo tax treatment of charitable

contributions.

Reading

(Optional for

Group Study):

“IRS adds six more forms to list that can be signed digitally; 16

now available”

https://www.irs.gov/newsroom/irs-adds-six-more-forms-to-list-

that-can-be-signed-digitally-16-now-available

“Memorandum on Deferring Payroll Tax Obligations in Light of

the Ongoing COVID-19 Disaster”

https://www.whitehouse.gov/presidential-actions/memorandum-

deferring-payroll-tax-obligations-light-ongoing-covid-19-disaster/

“Rollover Rules for Qualified Plan Loan Offset Amounts”

https://www.federalregister.gov/documents/2020/08/20/2020-

16564/rollover-rules-for-qualified-plan-loan-offset-amounts

See page 3–12.

3–2

outline outline outline outline outline

Outline

A. Deferring Payroll Tax Obligation –

Two Conditions

i. Applicable to any wages or

compensation less than $4,000

ii. No penalties, interest or additional

amount added to the tax

B. Uptick in Position of Payroll Taxes

i. Payroll taxes often include

lTax credits

lDeferral options for employers

& self-employed individuals

lAdditional deferral options

available

C. Deferred Applicable Taxes

i. Employee’s share of social security

taxes based on

lWages – IRC section 3121(a)

lCompensation – IRC 3231(e)

ii. Employers have to withhold starting

January 1, 2021

lAnd pay on or before April 30,

2021

iii. Interest & penalties will start

accruing May 1, 2021

lIf payment is NOT made

D. Deferred Taxes & Terminated

Employees

i. The company is on the hook for the

deferred taxes of terminated

employees

I. Payroll Tax Deferral – the Rules

A. Recent Clarifications by the IRS

i. On the difference between a deposit

and a payment toward an

employment tax liability

ii. How employers can defer their

share of social security tax

lReduce required deposits or

payments

lUp to the maximum of the

employer’s share of social

security tax

lReduction does not need to be

applied evenly

B. Other Matters Under the FAQs

i. Interaction with the research payroll

tax credit for small businesses and

the work opportunity tax credit

ii. Explains how to determine earnings

for the deferral period

C. Flipping the Coin

i. Payroll tax deferral may be a good

thing but may create problems

lDepending on your business type

D. Got a CP14 Notice? It May Be an

Error

i. The IRS may not have factored in

lPayroll tax deferral election

lUse of payroll taxes to give paid

sick leave & paid family leave to

employees

lClaiming tax credits

E. When to Use Existing 941X or Revised

941X

i. If adjusting a Q1 2020 or earlier

form, use the existing 941X

ii. If adjusting Q2 or later and have no

change to the employer’s share of

social security tax

lThe IRS recommends waiting

for the new form

iii. If adjusting Q2 or later and have

changes

lWait for the new revised Form

941X

iv. Don’t send a Form 941 with

“amended” or similar notation

written on it in an attempt to adjust

any quarter

II. Payroll Tax Deferral – Implementation

CPAR/OCT. ‘20

3–3

outline outline outline outline outline

Outline (continued)

A. Exceptions to Ordinary Income

i. Extent of forgiveness of loans

under the PPP

ii. Cancellation of qualified home

mortgage debt in 2020

lUp to $2 million

iii. Debtor is bankrupt or insolvent

B. Facts Always Matter – Connell v.

Commissioner

i. Stockbroker’s debt of over $3

million was cancelled

lIn exchange for his book of

business

ii. He treated it as capital gain

iii. Tax Court rejected his argument

iv. Appellate Court agreed with the

Tax Court

lNo evidence of the underlying

reason for the transaction

C. VHS, Inc. v. Commissioner

i. Lack of debt repayment does not

trigger bad debt deduction

lIn the absence of a bonafide

debtor/creditor relationship

D. Significant Modifications of Debt

Instruments

ii. Are viewed as COD income

iii. Adjusted issue price exceeds the

adjusted issue price of the original

debt instrument

E. Newest SBA Development

i. Vision and dental benefits are

payroll expenses

ii. Small loans less than $20,000 may

be also forgiven

III. Cancellation of Debt and Loan Forgiveness

A. Disaster-Related Postponement

i. The IRS is required by law to pay

interest calculated from the original

April 15 filing deadline by the

postponed deadline July 15

lAs long as the taxpayer files a

2019 Federal income tax return

by then

lNot applicable to businesses

B. 2020 Forms 1040 & 1040SR

i. Postcard return is not an option

ii. Form 1040 SR

lFour pages long & includes

table with standard deduction

amounts

iii. Forms 1040 & 1040SR

lNew lines for charitable

contribution deduction for non-

itemizers

lRecovery rebate credit for those

who received economic impact

payments

lEstimated tax payments from

Schedule 3

lVirtual currency holdings is now

on page one

C. New Line on Schedule 3

i. Applicable for qualified sick and

family leave credits for household

employers & self-employed

individuals

D. Payroll Tax Deferral & Self-Employed

Individuals

i. Deferral is addressed on their

income tax return

ii. Schedule SE no longer has a long

and short form, instead

lPart 1 – to figure tax

lPart 2 – to figure optional tax

payments

lPart 3 – to figure maximum

amount deferred

iii. Deferred amount is entered on

Schedule 3 under “other tax

payment”

E. Late Payment Penalties

i. Notices CP501, CP503 & CP504

will not be mailed

ii. Relief is provided from bad check

penalties for dishonored checks

received between March 1 and July

IV. New IRS Rules and Forms

3–4

Outline (continued)

outline outline outline outline outline

A. Eligible Partnerships That Can Opt Out

i. 100 or fewer partners

lIndividuals

lC corporations

lForeign entities

lThat would be treated as C

Corporations if domestic

lS corporations

lEstates of deceased partners

B. Rev. Proc. 2020-23

i. Allows such partnerships to file

amended returns to take advantage

of retroactive changes in the

CARES Act

V. Partnership Audit Issues

A. Six New Forms Added to the List

i. Form 706

ii. Form 706-NA

iii. Form 709

iv. Form 1120-ND

v. Form 3520

vi. Form 3520-A

B. Forms Initially Qualified for Digital

Signatures

i. Form 3115

ii. Form 8832

iii. Form 8802

iv. Form 1066

v. Form 1120-RIC

vi. Form 1120-C

vii. Form 1120-REIT

viii. Form 1120-L

ix. Form 1120-PC

x. Form 8453, Form 8878 series and

Form 8879 series

C. Tax Court Adjustments

i. Will accept electronically filed

stipulated decisions bearing digital

image signatures

ii. Revising practitioner’s guide to

electronic case access and filing to

reflect this adjustment

iii. Changes in submission of

documentary evidence and

procedures relating to subpoenas

iv. Administrative order 2020-03

updates to clarify limited entries of

appearance

lMay be filed in cases that were

on canceled trial sessions

VI. IRS & Tax Court: COVID-19 Provisions

CPAR/OCT. ‘20

3–5

outline outline outline outline outline

Outline (continued)

A. Quid Pro Quo Charitable Contributions

i. Proposed Regulations

lNo charitable contribution

deduction is allowed

lSafe harbor – SALT credits

received for the donation can be

disregarded if they don’t exceed

15% of the taxpayer’s payment

ii. Final Regulations

lQuid pro quo principle applies

whether the party doing it is the

donee or a third party

lSafe harbor applies to payments

of cash and not property

B. Treatment of Contributions for

Businesses

i. Payments are deductible as ordinary

and necessary business expenses

lNOT treated as charitable

contributions

ii. The safe harbor does not apply for

owners of these specified pass-

throughs

lIf the credits reduce state and

local tax

“I suggest you go back to

guidance issued last year in Rev.

Proc. 2019-12, which contains a

number of good examples of how

this works.”

— Barbara Weltman

C. Are Contributions Excludable or

Taxable?

i. Grants were a set percentage

l30% to 80% of state income tax

withholding on wages

ii. Tax Court – contributions are

capital

iii. Third Circuit – held the grants

taxable

lThere were no restrictions as to

the use of money

D. TCJA – IRC Section 118

i. Excludes from the definition of

contributions to capital any

contributions by a government

entity

VII. Other Changes for Filings

3–6

discussion questions discussion questions

3. Deferral of Payroll Tax Obligations and More

lAs the Discussion Leader, you should

introduce this video segment with words

similar to the following:

“In this segment, Barbara Weltman gives

us some of the highlights of the

presidential deferral pronouncement

“Memorandum on Deferring Payroll Tax

Obligations in Light of the Ongoing

COVID-19 Disaster,” as well as the IRS

developments on payroll-related

matters.”

lShow Segment 3. The transcript of this

video starts on page 3–19 of this guide.

lAfter playing the video, use the questions

provided or ones you have developed to

generate discussion. The answers to our

discussion questions are on pages 3–8

and 3–9. Additional objective questions

are on pages 3–10 and 3–11.

lAfter the discussion, complete the

evaluation form on page A–1.

1. What forms did the IRS add to the list of

those being accepted with digital

signatures and why did they make this

decision?

2. What was included in the presidential

memorandum and subsequent IRS

guidance providing for the option of

deferring the payment of certain payroll

taxes? What did your organization or

clients decide to do in this regard and

why?

3. What was included in the IRS guidance

on what the CARES Act provides for

regarding the deferral of certain payroll

taxes? What has been the experience, if

any, of your organization or clients with

such provisions?

4. What was the IRS guidance for

employers on how to handle corrections

for employment taxes on Form 941?

5. What are the tax implications of debt

forgiveness and debt modifications for a

borrower?

Discussion Questions

You may want to assign these discussion questions to individual participants before viewing

the video segment.

Instructions for Segment

Group Live Option

For additional information concerning CPE requirements, see page vi of this guide.

CPAR/OCT. ‘20

3–7

discussion questions discussion questions

6. What have been some changes in the

PPP loan forgiveness rules and why are

some tax advisors suggesting that

borrowers wait to file a loan forgiveness

application? What are your organizations

and clients doing in this regard and why?

7. What are the IRS regulations regarding

charitable contributions made by

individuals and businesses in return for

state and local tax credits?

Discussion Questions (continued)

3–83–8

suggested answers to discussion questions

1. What forms did the IRS add to the list of

those being accepted with digital

signatures and why did they make this

decision?

lForm 706 and Form 706-A: U.S.

Estate Tax Return

lForm 709: U.S. Gift Tax Return

lForm 1120-ND: Nuclear

Decommissioning Funds

lForm 3520 and Form 3520-A:

Transactions with Foreign Trusts and

Receipt of Certain Foreign Gifts

lDecision made to protect the health

of taxpayers and tax professionals

lReduces in-person contact allowing

both groups to work remotely

2. What was included in the presidential

memorandum and subsequent IRS

guidance providing for the option of

deferring the payment of certain payroll

taxes? What did your organization or

clients decide to do in this regard and

why?

lIncluded in memorandum and IRS

guidance:

vDeferral of employee’s share of

social security taxes from

September to December 2020

vApplies only to tax on

compensation less than $4,000 in

any bi-weekly period

vDeferral is only for January to

April 2021

vEmployers have to withhold

during Q1 2021 and pay the

deferred taxes by April 30, 2021

vBurden is on employers to be sure

deferred taxes get paid

vTaxpayer could try to collect

applicable taxes from ex-

employees

lParticipant response based on

personal/organizational experience

3. What was included in the IRS guidance

on what the CARES Act provides for

regarding the deferral of certain payroll

taxes? What has been the experience, if

any, of your organization or clients with

such provisions?

lGuidance on deferrals:

vIRS clarified difference between a

deposit and a payment toward an

employment tax liability

vEmployers may defer deposits of

employer’s share of social security

tax due during the payroll tax

deferral period

vEmployers may defer payments of

the tax imposed on wages during

the payroll tax deferral period

vPayroll tax deferral period is from

March 27 to December 31, 2020

vEmployers defer employer share

of social security taxes by

reducing required deposits or

payments for the return period to

the extent it falls within the

payroll tax deferral period

vReductions do not need to be

applied evenly

lParticipant response based on

personal/organizational experience

4. What was the IRS guidance for

employers on how to handle corrections

for employment taxes on Form 941?

lIRS released a draft of Form 941X in

July with final version to come by

September

lExisting 941X to be used if adjusting

a Q1 2020 period

lIf adjusting Q2 but not making

changes to employer’s share of social

security taxes, it is recommended to

not use the existing form and instead

wait for the new Form 941X

lIf adjusting Q2 and changing

employer’s share of social security

taxes, do not use the existing 941 and

instead wait for the new Form 941X

lForm 941 is not to be sent with

amended or similar notations to

adjust any quarters

3. Deferral of Payroll Tax Obligations and More

Suggested Answers to Discussion Questions

CPAR/OCT. ‘20

3–9

suggested answers to discussion questions

5. What are the tax implications of debt

forgiveness and debt modifications for a

borrower?

lGeneral rule is that the cancellation of

debt triggers ordinary income

lSeveral exceptions exist where debt

cancellation is not taxable, including

PPP forgiveness and cancellation of

qualified home mortgage debt

lNo taxable income if a debtor is

bankrupt or insolvent

lSignificant modification can be

viewed as COD income to the extent

the adjusted issue price of the

modified instrument exceeds the

adjusted issue price of the original

instrument

lA mere deferral of repayment or a

reduction in the interest rate for a

small business is not cancellation of

debt income

6. What have been some changes in the PPP

loan forgiveness rules and why are some

tax advisors suggesting that borrowers

wait to file a loan forgiveness

application? What are your organizations

and clients doing in this regard and why?

lChanges to loan forgiveness:

vForgiveness loans have already

been eased

vOriginally 75% of the loan had to

be used for payroll expenses, it

was then reduced to 60%, and it

could be changed again

vSBA now includes vision and

dental benefits are payroll

expenses

vRumors that the SBA may give full

loan forgiveness for small loans,

perhaps those under $20,000

lParticipant response based on

personal/organizational experience

7. What are the IRS regulations regarding

charitable contributions made by

individuals and businesses in return

forstate and local tax credits?

lIndividuals:

vNo charitable contribution

deduction is allowed for federal

income tax purposes

vQuid pro principle applies whether

the party doing it is the donee or a

third party

vSALT credits received for the

donation can be disregarded if they

don’t exceed 15% of the taxpayer’s

payment

vIRS safe harbor applies only to

payments of cash and not property

lBusinesses:

vPayments are deductible as

ordinary and necessary business

expenses

vPayments not treated as charitable

contributions

vThe safe harbor doesn’t apply to

owners of specified pass-throughs

if the credits reduce state and local

tax

Suggested Answers to Discussion Questions (continued)

3–103–103–10

objective questions objective questions

1. Which taxes are subject to the option of

deferral as per the presidential

memorandum of August 2020 for

September through December 2020?

a) employee share of social security

taxes

b) all social security and Medicare taxes

c) FUTA

d) federal income taxes

2. What was the payroll tax deferral period

made available under the CARES Act?

a) March 27, 2020 to December 31,

2020

b) September 1, 2020 to December 31,

2020

c) September 1, 2020 to April 30, 2021

d) January 1, 2021 to April 30, 2021

3. How should an employer handle

corrections for employment taxes related

to Q1 of 2020 according to the IRS

guidance?

a) resend a form 941 with amended

notation written on it

b) use the existing 941X form

c) wait for the new Form 941X to be

released

d) wait for correspondence from the IRS

4. Which of the following is correct about

the tax treatment of income from debt

cancellation?

a) Cancellation of debt never triggers

ordinary income.

b) Debt cancellation is taxable under all

circumstances.

c) Forgiveness of loans under the PPP

program is taxable.

d) Income is taxable if the debtor is

bankrupt or insolvent.

5. Which of the following is correct about

interest on tax refunds for the 2019 tax

year?

a) The IRS is required to issue interest

on tax refunds then they are paid 90

days after the return is filed.

b) Interest on refunds applies to

corporations as opposed to individual

tax returns.

c) They will be taxable income for the

2020 returns.

d) The calculation of interest for 2019

was based on the postponed deadline

date of July 15, 2020.

6. Which of the following is correct about

the centralized partnership audit regime

created by the Bipartisan Budget Act?

a) All partnerships are prohibited from

opting out of the BBA regime.

b) IRS audit adjustments are made at the

partnership level.

c) Only partnerships with 100 or more

partners can opt out of the BBA

regime.

d) Partnerships CANNOT push out IRS

audit adjustments to its partners.

7. Which of the following is correct about

the workaround to the SALT cap using

charitable contributions?

a) The IRS revised its initial regulations

and now allows for a charitable

contribution deduction when there is

a quid pro quo.

b) The IRS quid pro quo principle does

NOT apply when the party doing it is

a third party.

c) SALT credits received for a donation

can be disregarded if they are less

than 15% of the taxpayer’s payment.

d) Such payments are treated similarly

for tax purposes by individuals and

specified pass-through entities.

You may want to use these objective questions to test knowledge and/or to generate further

discussion; these questions are only for group live purposes. Most of these questions are

based on the video segment, a few may be based on the reading for self-study that starts on

page 3–12.

Objective Questions

3. Deferral of Payroll Tax Obligations and More

CPAR/OCT. ‘20

3–11

objective questions objective questions

8. Why did the IRS make the decision in

August to allow the use of digital

signatures on specified forms that cannot

be filed electronically?

a) improved IT infrastructure within the

IRS

b) processing effectiveness

c) identity theft risks

d) protect the health of taxpayers and

tax professionals

9. Employers may choose to defer

withholding of certain taxes on

compensation made between September

and December 2020 if the total amount

of wages is less than:

a) $5,000 per month.

b) $1,000 per bi-weekly pay period.

c) $4,000 per week.

d) $4,000 per bi-weekly pay period.

10. Which of the following is correct about

qualified plan loan offsets (QPLO)?

a) A QPLO amount is a plan loan offset

treated as distributed from a

qualified employer plan for any

reason.

b) Not all plan loan offsets are qualified

plan loan offsets.

c) A QPLO is NOT treated as being

distributed from a qualified

employer plan if by reason of the

termination of the employee.

d) QPLO amounts must be rolled over

to another retirement plan within 30

days of distribution.

Objective Questions (continued)

3–12

3–123–12

3–12

Self-Study Option

Reading (Optional for Group Study)

reading reading reading reading

IRS ADDS SIX MORE FORMS TO LIST THAT CAN BE

SIGNED DIGITALLY; 16 NOW AVAILABLE

https://www.irs.gov/newsroom/irs-adds-six-

more-forms-to-list-that-can-be-signed-

digitally-16-now-available

IR-2020-206, September 10, 2020

WASHINGTON — On August 28, the IRS

announced that it would temporarily allow

the use of digital signatures on certain

forms that cannot be filed electronically.

Today, the agency added several more

forms (PDF) PDF to that list.

The IRS made this decision to help protect

the health of taxpayers and tax

professionals during the COVID-19

pandemic. The change will help to reduce

in-person contact and lessen the risk to

taxpayers and tax professionals, allowing

both groups to work remotely to timely file

forms.

The IRS added the following forms to the

list of those being accepted digitally:

lForm 706, U.S. Estate (and

Generation-Skipping Transfer) Tax

Return;

lForm 706-NA, U.S. Estate (and

Generation-Skipping Transfer) Tax

Return;

lForm 709, U.S. Gift (and Generation-

Skipping Transfer) Tax Return;

lForm 1120-ND, Return for Nuclear

Decommissioning Funds and Certain

Related Persons;

lForm 3520, Annual Return To Report

Transactions With Foreign Trusts and

Receipt of Certain Foreign Gifts; and

lForm 3520-A, Annual Information

Return of Foreign Trust With a U.S.

Owner.

The forms are available at IRS.gov and

through tax professional's software

products. These forms cannot be e-filed

and generally are printed and mailed.

The below list was announced August 28,

and all of these forms can be submitted

with digital signatures if mailed by or on

December 31, 2020:

lIn order to ensure adherence to

NASBA guidelines regarding self-

study, the CPA Report and CPA Report

Government/Not-for-Profit Self-Study

Professional Education Centers are no

longer available. Customers should

contact their company administrators

for information on taking course exams

and receiving CPE credit for the

courses.

lCustomers may contact Kaplan

Financial Education at

cpesupport@kaplan.com to obtain

certificates previously earned through

the CPA Report Self-Study and CPA

Report Government/Not-for-Profit Self-

Study Professional Education Centers.

lCustomers interested in the self-study

format of the CPA Report can find

information on Kaplan Financial

Education's self-study libraries at

Online Accounting CPE Courses.

CPA Report Update

CPAR/OCT. ‘20

3–13

reading reading reading reading

lForm 3115, Application for Change in

Accounting Method;

lForm 8832, Entity Classification

Election;

lForm 8802, Application for U.S.

Residency Certification;

lForm 1066, U.S. Income Tax Return for

Real Estate Mortgage Investment

Conduit;

lForm 1120-RIC, U.S. Income Tax

Return For Regulated Investment

Companies;

lForm 1120-C, U.S. Income Tax Return

for Cooperative Associations;

lForm 1120-REIT, U.S. Income Tax

Return for Real Estate Investment

Trusts;

lForm 1120-L, U.S. Life Insurance

Company Income Tax Return;

lForm 1120-PC, U.S. Property and

Casualty Insurance Company Income

Tax Return; and

lForm 8453 series, Form 8878 series,

and Form 8879 series regarding IRS e-

file Signature Authorization Forms.

The IRS will continue to monitor this

temporary option for e-signatures and

determine if additional steps are needed.

In addition, the IRS understands the

importance of digital signatures to the tax

community. The agency will continue to

review its processes to determine where

long-term actions can help reduce burden

for the tax community, while at the same

appropriately balancing that with critical

security and protection against identity theft

and fraud.

BUDGET & SPENDING

Issued on: August 8, 2020

https://www.whitehouse.gov/presidential-

actions/memorandum-deferring-payroll-tax-

obligations-light-ongoing-covid-19-disaster/

MEMORANDUM FOR THE

SECRETARY OF THE

TREASURY

SUBJECT:

Deferring Payroll Tax

Obligations in Light the Ongoing COVID-

19 Disaster

By the authority vested in me as President

by the Constitution and the laws of the

United States of America, it is hereby

ordered as follows:

Section 1. Policy. The 2019 novel

coronavirus (COVID-19) that originated in

the People’s Republic of China has caused

significant, sudden, and unexpected

disruptions to the American economy. On

March 13, 2020, I determined that the

COVID-19 pandemic is of sufficient

severity and magnitude to warrant an

emergency declaration under section 501(b)

of the Robert T. Stafford Disaster Relief and

Emergency Assistance Act, 42 U.S.C. 5121-

5207, and that is still the case today.

American workers have been particularly

hard hit by this ongoing disaster. While the

Department of the Treasury has already

undertaken historic efforts to alleviate the

hardships of our citizens, it is clear that

further temporary relief is necessary to

support working Americans during these

challenging times. To that end, today I am

directing the Secretary of the Treasury to

use his authority to defer certain payroll tax

obligations with respect to the American

workers most in need. This modest, targeted

action will put money directly in the pockets

MEMORANDUM ON DEFERRING PAYROLL TAX

OBLIGATIONS IN LIGHT OF THE ONGOING COVID-19

DISASTER

3–14

reading reading reading reading

of American workers and generate

additional incentives for work and

employment, right when the money is

needed most.

Sec. 2. Deferring Certain Payroll Tax

Obligations. The Secretary of the Treasury

is hereby directed to use his authority

pursuant to 26 U.S.C. 7508A to defer the

withholding, deposit, and payment of the tax

imposed by 26 U.S.C. 3101(a), and so much

of the tax imposed by 26 U.S.C. 3201 as is

attributable to the rate in effect under 26

U.S.C. 3101(a), on wages or compensation,

as applicable, paid during the period of

September 1, 2020, through December 31,

2020, subject to the following conditions:

(a) The deferral shall be made available with

respect to any employee the amount of

whose wages or compensation, as

applicable, payable during any bi-weekly

pay period generally is less than $4,000,

calculated on a pre-tax basis, or the

equivalent amount with respect to other pay

periods.

(b) Amounts deferred pursuant to the

implementation of this memorandum shall

be deferred without any penalties, interest,

additional amount, or addition to the tax.

Sec. 3. Authorizing Guidance. The Secretary

of the Treasury shall issue guidance to

implement this memorandum.

Sec. 4. Tax Forgiveness. The Secretary of

the Treasury shall explore avenues,

including legislation, to eliminate the

obligation to pay the taxes deferred pursuant

to the implementation of this memorandum.

Sec. 5. General Provisions. (a) Nothing in

this memorandum shall be construed to

impair or otherwise affect:

(i) the authority granted by law to an

executive department or agency, or the head

thereof; or

(ii) the functions of the Director of the

Office of Management and Budget relating

to budgetary, administrative, or legislative

proposals.

(b) This memorandum shall be implemented

consistent with applicable law and subject to

the availability of appropriations.

and does not, create any right or benefit,

substantive or procedural, enforceable at law

or in equity by any party against the United

States, its departments, agencies, or entities,

its officers, employees, or agents, or any

other person.

(d) You are authorized and directed to

publish this memorandum in the Federal

DONALD J. TRUMP

CPAR/OCT. ‘20

3–15

reading reading reading reading

ROLLOVER RULES FOR QUALIFIED PLAN LOAN

OFFSET AMOUNTS

https://www.federalregister.gov/documents/2

020/08/20/2020-16564/rollover-rules-for-

qualified-plan-loan-offset-amounts

AGENCY:

Internal Revenue Service (IRS), Treasury

ACTION:

Notice of proposed rulemaking.

SUMMARY:

This document sets forth proposed

regulations relating to amendments made to

section 402(c) of the Internal Revenue Code

(Code) by section 13613 of the Tax Cuts

and Jobs Act, Public Law 115-97 (131 Stat.

2054) (TCJA). Section 13613 of TCJA

provides an extended rollover period for a

qualified plan loan offset, which is a type of

plan loan offset. These regulations affect

participants, beneficiaries, sponsors, and

administrators of qualified employer plans.

DATES:

Written or electronic comments and requests

for a public hearing must be received by

October 5, 2020.

ADDRESSES:

Commenters are strongly encouraged to

submit public comments electronically.

Submit electronic submissions via the

Federal eRulemaking Portal at

www.regulations.gov (indicate IRS and

REG-116475-19) by following the online

instructions for submitting comments. Once

submitted to the Federal eRulemaking

Portal, comments cannot be edited or

withdrawn. The IRS expects to have limited

personnel available to process public

comments that are submitted on paper

through mail. Until further notice, any

comments submitted on paper will be

considered to the extent practicable. The

Department of the Treasury (Treasury

Department) and the IRS will publish for

public availability any comment received to

its public docket, whether submitted

electronically or in hard copy. Send hard

copy submissions to CC:PA:LPD:PR (REG-

116475-19), Room 5203, Internal Revenue

Service, P.O. Box 7604, Ben Franklin

Station, Washington, DC 20044.

FOR FURTHER

INFORMATION CONTACT:

Concerning the proposed amendments to the

regulations, Naomi Lehr at (202) 317-4102,

Vernon Carter at (202) 317-6799, or Pamela

Kinard at (202) 317-6000; concerning

submissions of comments and requests for a

hearing, Regina Johnson at (202) 317-5177

(not toll-free numbers).

SUPPLEMENTARY

INFORMATION:

Background

This document sets forth proposed

amendments to 26 CFR part 1, by adding §

1.402(c)-3 to the Income Tax Regulations

solely to reflect changes to section 402(c) of

the Code, as amended by section 13613 of

TCJA. On December 20, 2019, the Further

Consolidated Appropriations Act of 2020,

Public Law 116-94 (133 Stat. 2534) (the

Act), was enacted. Section 114 of Division

O of the Act, titled “Setting Every

Community Up for Retirement

Enhancement Act of 2019” (SECURE Act),

amended section 401(a)(9) of the Code by

changing the required beginning date

applicable to section 401(a) plans and other

eligible retirement plans described in section

402(c)(8). The Treasury Department and

IRS anticipate providing separate guidance

on section 114 of the SECURE Act,

including amending § 1.402(c)-2 to reflect

changes made by the SECURE Act and to

add new level designations for each

paragraph in the questions and answers to

satisfy Federal Register requirements. It is

anticipated that the proposed § 1.402(c)-3

will be combined with § 1.402(c)-2 in

connection with that project (including

replacing Q&-9 of § 1.402(c)-2 with

paragraph (a) of proposed § 1.402(c)-3).

3–16

reading reading reading reading

1. Plan Loans, Eligible Rollover

Distributions, and Plan Loan Offset

Amounts

Section 72(p)(1) provides that if, during any

taxable year, a participant or beneficiary

receives (directly or indirectly) any amount

as a loan from a qualified employer plan (as

defined in section 72(p)(4)(A)),[1] such

amount shall be treated as having been

received by the individual as a distribution

from the plan. For certain plan loans, section

72(p)(2) provides an exception to the

general treatment of loans as distributions

under section 72(p)(1).

For the exception under section 72(p)(2) to

apply so that a plan loan is not treated as a

distribution under section 72(p)(1) for the

taxable year in which the loan is received,

the loan generally must satisfy three

requirements:

(1) The loan, by its terms, must satisfy the

limits on loan amounts, as described in

section 72(p)(2)(A);

(2) The loan, by its terms, generally must be

repayable within 5 years, as described in

section 72(p)(2)(B); and

(3) The loan must require substantially level

amortization over the term of the loan, as

described in section 72(p)(2)(C).

Section 401(a)(31) requires that a plan

qualified under section 401(a) provide for

the direct transfer of eligible rollover

distributions. A similar rule applies to

section 403(a) annuity plans, section 403(b)

tax-sheltered annuities, and section 457

eligible governmental plans. See generally

sections 403(a)(1), 403(b)(10), and

457(d)(1)(C).

Sections 402(c)(3) and 408(d)(3) provide

that any amount distributed from a qualified

plan or individual retirement account or

annuity (IRA) will be excluded from income

if it is transferred to an eligible retirement

plan no later than the 60th day following the

day the distribution is received. A similar

rule applies to section 403(a) annuity plans,

section 403(b) tax-sheltered annuities, and

section 457 eligible governmental plans. See

generally sections 403(a)(4)(B),

403(b)(8)(B), and 457(e)(16)(B).

Sections 402(c)(3)(B) and 408(d)(3)(I)

provide that the Secretary may waive the 60-

day rollover requirement “where the failure

to waive such requirement would be against

equity or good conscience, including

casualty, disaster, or other events beyond the

reasonable control of the individual subject

to such requirement.” See generally Rev.

Proc. 2016-47, 2016-37 I.R.B. 346, which

sets forth a self-certification procedure that

taxpayers may use in certain circumstances

to claim a waiver of the 60-day deadline for

completing a rollover under section

402(c)(3)(B) or 408(d)(3)(I), and Rev. Proc.

2020-4, 2020-1 I.R.B. 148, which sets forth

procedures that taxpayers may use to request

a waiver of the 60-day rollover deadline by

submitting a request for a private letter

ruling.[2]

Section 1.402(c)-2, Q&A-3(a), provides that,

unless specifically excluded, an eligible

rollover distribution means any distribution

to an employee (or to a spousal distributee

described in § 1.402(c)-2, Q&A-12(a)) of all

or any portion of the balance to the credit of

the employee in a qualified plan. Section

1.402(c)-2, Q&A-3(b), provides that certain

distributions (for example, required

minimum distributions under section

401(a)(9)) are not eligible rollover

distributions.

Section 1.402(c)-2, Q&A-9(a), provides that

a distribution of a plan loan offset amount

(as defined in § 1.402(c)-2, Q&A-9(b)) is an

eligible rollover distribution if it satisfies §

1.402(c)-2, Q&A-3. Thus, an amount not

exceeding the plan loan offset amount may

be rolled over by the employee (or spousal

distributee) to an eligible retirement plan

within the 60-day period described in

section 402(c)(3), unless the plan loan offset

amount fails to be an eligible rollover

distribution for another reason.

Section 1.402(c)-2, Q&A-9(b), provides that

a distribution of a plan loan offset amount is

a distribution that occurs when, under the

plan terms governing the loan, the

employee's accrued benefit is reduced

(offset) in order to repay the loan. This may

occur when, for example, the terms

CPAR/OCT. ‘20

3–17

reading reading reading reading

governing a plan loan require that, in the

event of an employee's termination of

employment or request for a distribution, the

loan is to be repaid immediately or treated

as in default. A plan loan offset may also

occur when, under the terms of the plan

loan, the loan is canceled, accelerated, or

treated as if it is in default (for example, if

the plan treats a loan as in default upon an

employee's termination of employment or

within a specified period thereafter). See

also § 1.72(p)-1, Q&A-13(a)(2). Because a

plan loan offset is an actual distribution for

purposes of the Code, not a deemed

distribution under section 72(p), a plan loan

offset cannot occur prior to a distributable

event. See generally § 1.72(p)-1, Q&A-

13(b).

2. Qualified Plan Loan Offset Amounts

Section 13613 of TCJA amended section

402(c)(3) of the Code to provide an

extended rollover deadline for qualified plan

loan offset (QPLO) amounts (as defined in

section 402(c)(3)(C)(ii)).[3] Any portion of a

QPLO amount (up to the entire QPLO

amount) may be rolled over into an eligible

retirement plan by the individual's tax filing

due date (including extensions) for the

taxable year in which the offset occurs.

A QPLO amount is defined in section

402(c)(3)(C)(ii) as a plan loan offset amount

that is treated as distributed from a qualified

employer plan to an employee or beneficiary

solely by reason of:

(1) The termination of the qualified

employer plan, or

(2) The failure to meet the repayment terms

of the loan from such plan because of the

severance from employment of the

employee.

In addition, section 402(c)(3)(C)(iv)

provides that the extended rollover period

will not apply “to any plan loan offset

amount unless such plan loan offset amount

relates to a loan to which section 72(p)(1)

does not apply by reason of section

72(p)(2).”

Section 301.9100-2(b) of the regulations

provides rules for automatic six-month

extensions to make regulatory or statutory

elections. Under this rule, a taxpayer will

receive an automatic extension of 6 months

from the due date of a return, excluding

extensions, to make elections that otherwise

must be made by the due date of the return

plus extensions, provided that:

(1) The taxpayer's return was timely filed for

the year the election should have been made;

and

(2) The taxpayer takes appropriate corrective

action within the six-month period.

Section 301.9100-2(b) further provides that

paragraph (b) does not apply to regulatory or

statutory elections that must be made by the

due date of the return excluding extensions.

Explanation of Provisions

1. In General

These proposed regulations add § 1.402(c)-3

to take into account changes to the rollover

rules made by section 13613 of TCJA with

respect to QPLO amounts. As an initial

matter, the proposed regulations confirm that

a QPLO is a type of plan loan offset;

accordingly, most of the general rules

relating to plan loan offset amounts apply to

QPLO amounts. For example, the rule that a

plan loan offset amount is an eligible

rollover distribution applies to a QPLO

amount. In addition, the rules in §

1.401(a)(31)-1, Q&A-16 (guidance

concerning the offering of a direct rollover

of a plan loan offset amount), and §

31.3405(c)-1, Q&A-11 (guidance concerning

special withholding rules with respect to

plan loan offset amounts), applicable to plan

loan offset amounts in general, apply to

QPLO amounts. The proposed regulations

provide examples to illustrate the interaction

of the special rules for QPLOs with the

general rules for plan loan offsets.

2. Rollover Period for Plan Loan Offset

Amounts, Including QPLO Amounts

Consistent with § 1.402(c)-2, Q&A-9, the

proposed regulations provide that a

distribution of a plan loan offset amount that

is an eligible rollover distribution and not a

QPLO amount may be rolled over by the

3–18

reading reading reading reading

employee (or spousal distributee) to an

eligible retirement plan (as defined in

section 402(c)(8)(B)) within the 60-day

period set forth in section 402(c)(3)(A).

While a plan loan offset generally is subject

to this 60-day rollover period, there are

special rules for the waiver of the 60-day

rollover deadline. For further discussion of

the special rules, see the Background section

of this preamble.

Consistent with the amended provisions of

section 402(c)(3)(C), the proposed

regulations provide that a distribution of a

plan loan offset amount that is an eligible

rollover distribution and a QPLO amount

may be rolled over by the employee (or

spousal distributee) to an eligible retirement

plan through the period ending on the

individual's tax filing due date (including

extensions) for the taxable year in which the

offset is treated as distributed from a

qualified employer plan. Thus, a taxpayer

with an eligible rollover distribution that is a

QPLO amount may roll over any portion of

the distribution to an eligible retirement

plan, including another qualified retirement

plan (if that plan permits) or an IRA, by the

taxpayer's deadline for filing income taxes

for the year of the distribution, including

extensions.

If a taxpayer to whom a QPLO amount is

distributed satisfies the conditions in §

301.9100-2(b), the taxpayer will have an

extended period past his or her tax filing due

date in which to complete a rollover of the

QPLO amount, even if the taxpayer does not

request an extension to file his or her

income tax return but instead files the return

by the unextended tax filing due date. For

example, if, on June 1, 2020, Taxpayer A has

an eligible rollover distribution of $10,000

that is a QPLO amount, she may be able to

roll over the $10,000 amount as late as

October 15, 2021. Pursuant to § 301.9100-

2(b), this automatic six-month extension

applies if Taxpayer A timely files her tax

return by April 15, 2021 (the due date of her

return), rolls over the QPLO amount within

the six-month period ending on October 15,

2021, and amends her return by October 15,

2021, as necessary to reflect rollover. See

the further discussion of § 301.9100-2(b) in

the Background section of this preamble.

3. Definitions of Plan Loan Offset

Amount, QPLO Amount, and Qualified

Employer Plan

Consistent with § 1.402(c)-2, Q&A-9(b), the

proposed regulations provide that a plan

loan offset amount is the amount by which,

under plan terms governing a plan loan, an

employee's accrued benefit is reduced

(offset) in order to repay the loan (including

the enforcement of the plan's security

interest in the employee's accrued benefit). A

distribution of a plan loan offset amount is

an actual distribution, not a deemed

distribution under section 72(p).

Section 1.402(c)-3(a)(2)(iii)(B) of the

proposed regulations defines a QPLO

amount as a plan loan offset amount that

satisfies two requirements. First, the plan

loan offset amount must be treated as

distributed from a qualified employer plan to

an employee or beneficiary solely by reason

of the termination of the qualified employer

plan, or the failure to meet the repayment

terms of the loan from such plan because of

the severance from employment of the

employee. Second, the plan loan offset

amount must relate to a plan loan that met

the requirements of section 72(p)(2)

immediately prior to the termination of the

qualified employer plan or the severance

from employment of the employee, as

applicable.

The proposed regulations define a qualified

employer plan, for purposes of the QPLO

amount definition, as a qualified employer

plan as defined in section 72(p)(4). For a

discussion of the definition of a qualified

employer plan, see the Background section

of this preamble.

Please see full document at

https://www.federalregister.gov/documents/2

020/08/20/2020-16564/rollover-rules-for-

qualified-plan-loan-offset-amounts

CPAR/OCT. ‘20

3–19

3–193–193–19

3–193–193–193–193–193–193–193–193–193–193–193–19

3–19

video transcript video transcript

WILLIAMS: On August 8, 2020, the White House issued a “Memorandum on

Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19

Disaster” allowing deferral of the withholding, deposit, and payment of

the tax on wages or compensation, paid during the period of September

1, 2020 through December 31, 2020, subject to the following conditions:

a) “The deferral shall be made available with respect to any employee

the amount of whose wages or compensation, as applicable, payable

during any bi-weekly pay period generally is less than $4,000,

calculated on a pre-tax basis, or the equivalent amount with respect to

other pay periods.

b) Amounts deferred pursuant to the implementation of this

memorandum shall be deferred without any penalties, interest, additional

amount, or addition to the tax.”

On September 11, 2020 the IRS released a revised Form 941-X Adjusted

Employer’s Quarterly Federal Tax Return or Claim for Refund, (Rev.

July 2020) that will allow revision to Forms 941 that are impacted by

provisions found in the Families First Coronavirus Relief Act and/or the

CARES Act that impacted second quarter payroll. The related revised

instructions to the form were also issued at the same time. Employers

who had been delaying filing revised Forms 941 for the second quarter

awaiting the finalization of this form should now file those revisions.

It seems that payroll taxes have taken a greater position in the tax world

than income taxes. We have tax credits paid through payroll taxes. We

have deferral options for employers and self-employed individuals. And

we have a presidential memorandum on another deferral option for

employees.

Barbara Weltman, president of Big Ideas for Small Business starts by

telling us about the presidential deferral pronouncement, and continues

with the IRS developments on payroll-related matters.

WELTMAN: In early August the president issued a memorandum providing for

deferral of the employee's share of social security taxes from September

1, 2020 through December 31, 2020. The deferral would apply only with

respect to the tax on compensation less than $4,000 in any bi-weekly

pay period, which amounts to compensation of about $100,000 a year.

The language was very general, leaving the details up to the secretary of

the treasury and even encouraging him to explore ways to give tax

forgiveness for the deferred FICA. Now we have IRS guidance.

The guidance refers to wages under Code Section 3121(a) and

compensation under Code Section 3231(e) that are paid during the

period beginning September 1, 2020 through the end of the year. It's the

employee's share of social security taxes that gets deferred. They are

referred to as deferred applicable taxes.

But deferral is only for the period beginning January 1, 2021 and ending

on April 30, 2021. This means that employers have to withhold during

the first quarter of 2021 and pay the deferred taxes by April 30, 2021.

If they're not paid through withholding in Q1 2021, interest penalties

and additions to tax begin to accrue on May 1, 2021. So, the burden is

on the employer to be sure the deferred taxes get paid.

Video Transcript

3. Deferral of Payroll Tax Obligations and More

3–193–19

3–20

video transcript video transcript

If an employee is no longer working for the company, the employer is on

the hook for the deferred taxes. The guidance says, and I quote, "If

necessary, the affected taxpayer may make arrangements to otherwise

collect the applicable taxes from the employee," close quote.

But really, how is an employer supposed to collect the deferred taxes from

an employee who is in the wind? I suspect this deferral option won't be

popular among employers.

WILLIAMS: But what should our clients do if they want to implement this deferral for

employees?

WELTMAN: The IRS is revising Form 941 to take into account the deferral for

employees, the withholding that isn't made to cover the employee's share

of social security taxes. The deferred amount will be accounted for on

page three in part three of the form, line 24. I haven't seen the draft of the

form, but by the time you're viewing this program it will probably be

posted.

WILLIAMS: The presidential memorandum dealt with the employee portion of FICA.

Barbara talks about the employer portion that can be deferred, the

employee's share of social security taxes. This was a measure in the

CARES Act.

WELTMAN: The IRS has extensive FAQs on the employer's deferral, and it has

updated them. For example, the IRS has clarified the difference between a

deposit and a payment toward an employment tax liability. Depositing

taxes and paying taxes are separate obligations, and there are failure to

deposit penalties and failure to pay penalties.

So, we have to be careful to determine whether a client is subject to a

deposit requirement and pays employment taxes. Employers may defer

deposits of the employer's share of social security tax due during the

payroll tax deferral period and payments of the tax imposed on wages

during that period. The payroll tax deferral period began on March 27,

2020 and ends on December 31, 2020.

The IRS has made it clear exactly how an employer does deferral. An

employer defers the employer's share of social security tax by reducing

required deposits or payments for the calendar quarter by an amount up to

the maximum of the employer's share of social security tax for the return

period to the extent the return period falls within the payroll tax deferral

period.

This reduction does not need to be applied evenly during the return

period. For example, if an employer will have $20,000 in total liability for

the employer's share of social security tax for the third quarter of 2020,

has not yet reduced its deposits for deferral, and has one deposit of

$20,000 remaining for that calendar quarter, the employer may defer the

entire $20,000 deposit.

WILLIAMS: Keep in mind reporting requirements. Form 941 hadn't been updated for

the first quarter to reflect deferral, but it has for the second, third, and

fourth quarters. Employers that reported the full amount of employment

tax liability on the form for the first quarter, but chose to defer deposits,

had a discrepancy for that quarter.

WELTMAN: The IRS said it was sending notices to these employers identifying the

difference between the liability reported on Form 941 for the first

calendar quarter and the deposits and payments made for the first calendar

CPAR/OCT. ‘20

3–21

video transcript video transcript

quarter for an unresolved amount. The notice has additional information

instructing the employer how to inform the IRS that it deferred a deposit

or payment of the employer's share of social security tax due after March

27, 2020 for the first quarter of 2020.

The new FAQs cover a number of other matters, such as the interaction

with the research payroll tax credit for small businesses and the work

opportunity tax credit.

And I want to mention that a draft Schedule SE Form 1040 or 1040SR for

self-employment tax has a new part three to figure the maximum deferral

amount. Remember self-employed individuals can also opt to defer the

employer's share of social security taxes. It appears from the form that you

figure the regular self-employment tax, one-half of which is deductible.

Then you separately figure the deferral amount. Remember that deferral is

optional.

The FAQ explains how to determine net earnings for the deferral period.

Any reasonable method can be used, or you can rely on a percentage. That

is to assume that 77.5% of net earnings for the year are in the deferral

period.

WILLIAMS: Barbara Weltman gives us her views on the option for deferred payroll

taxes.

WELTMAN: There is still much confusion about deferral. How is this going to affect

PPP loan forgiveness? How are businesses going to pay for repayment in

2021 and 2022?

Here's where we come in, providing advice on how to handle deferral. It's

been a tax mantra forever that deferral is good. But for some businesses

and self-employed individuals, deferral may create problems. So, watch

out.

WILLIAMS: Some employers who planned on taking advantage of deferral or using the

paid sick leave and paid family leave tax credits didn't deposit as much in

payroll taxes as the IRS thought they would. The IRS generated letters to

employers. Now what?

WELTMAN: Following a letter by a congressman the IRS recognized that it made a

mistake in sending out CP14 balance due notices to employers informing

them of their failure to deposit taxes.

The IRS apparently didn't factor in the employer's intention to defer

certain payroll taxes or use payroll taxes to give paid sick leave and paid

family leave to employees for which they could claim tax credits.

WILLIAMS: Barbara discusses what employers are supposed to do if they need to make

corrections to their Form 941.

WELTMAN: You may recall that the IRS released a draft of Form 941X back in July.

The IRS is expected to have a final version of this form by the end of

September. The IRS has some guidance for employers on how to handle

corrections for employment taxes.

Number one: If adjusting a 1Q 2020 or earlier form, you can use the

existing 941X. Number two: If adjusting a 2Q or later and not making any

increase or decrease to the employer's share of social security tax or any

of the new COVID related lines that were added to the Q2 Form 941, the

IRS strongly recommends that you not use the existing Form 941X and

instead wait for the new Form 941X revision to be released. Number

three: If adjusting 2Q or later but are making any increase or decrease to

3–22

video transcript video transcript

the employer's share of social security tax or any of the new COVID

related lines, do not use the existing 941X. Wait for the new Form 941X

revision. Number four: don't send a Form 941 with amended or similar

notation written on it in an attempt to adjust any quarter.

If you have already done either step three or four, wait for correspondence

from the IRS to find out if the return was processable or had to be

rejected. Given the back load of paper forms and correspondence due to

COVID-19, the IRS is unable to approximate how long that may be.

WILLIAMS: During the pandemic there have been a lot of loans to help keep

individuals and businesses afloat. If the money is repaid, it’s all well and

good. But too often the funds aren't repaid. This triggers tax consequences

for the borrower and the lender. Barbara Weltman is telling us from a

borrower’s perspective what happens when loans are canceled and if

cancellation of debt income is always ordinary.

WELTMAN: As you know, the general rule is that the cancellation of debt triggers

ordinary income. There are several exceptions in which debt cancellation

isn't taxable at all, such as the extent of forgiveness of loans under the

paycheck protection program or cancellation of qualified home mortgage

debt in 2020 up to $2 million. And, of course, there's no income if the

debtor is bankrupt or to the extent of a debtor's insolvency.

Usually a cancellation of debt is ordinary income. Remember, there's no

sale or exchange involved. But a stockbroker who had debt over $3

million canceled argued that it was capital gain. The facts of the case

matter.

To entice him to change firms, he was given a loan. When he was

terminated, the financial industry regulatory authority arbitration panel

awarded him the cancellation of debt. He argued that this was an

exchange for his book, the information about his clients.

The tax court rejected his argument and now an appellate court has agreed

the tax court applied the origin of the claim test, which says to look at the

underlying reason for the transaction. The appellate court said that the

application of this test was not clearly erroneous, meaning it was okay to

be used. There is no evidence to show that the cancellation of debt was

the price of his book.

WILLIAMS: Things get complicated when families get involved. Let's look at the

unpaid funds from the lender’s perspective.

WELTMAN: We had another case in which a family business advanced $111 million to

one son to help him start business ventures. Eventually, when the

advances weren't repaid, the business wrote them off as bad debts.

But an appellate court affirming the tax court said the advances weren't

loans because there was no bonafide debtor/creditor relationship. So, no

bad debt deduction was allowed. And the advances weren't ordinary and

necessary business expenses, so there was no other way to deduct them.

The lesson here is that family transactions attract special scrutiny from the

IRS. So be sure that they're handled properly.

WILLIAMS: During economic downturns, some businesses may want to restructure

their debt. What should borrowers be concerned about in this process

assuming lenders are amenable to restructuring?

WELTMAN: Restructuring can result in taxable income for borrowers. As I've just

mentioned, the cancellation of debt is taxable. This is especially so where

corporations issued debt instruments.

CPAR/OCT. ‘20

3–23

video transcript video transcript

Where there is a significant modification of a debt instrument this is

viewed as COD income to the extent that the adjusted issue price of the

modified debt instrument exceeds the adjusted issue price of the original

debt instrument.

For small businesses that merely modify their loan arrangements with

lenders, look to see if the amount of debt is reduced. If it's merely deferral

of repayment or a reduction in the interest rate, that's not cancellation of

debt income.

WILLIAMS: PPP debt forgiveness is not automatic. Borrowers need to file a loan

forgiveness application; however, some tax advisors are suggesting that

there is no rush to do so. Barbara explains why.

WELTMAN: Clients who obtained a paycheck protection program loan can apply for

loan forgiveness. The window to do this opened in mid-August, but there

are some reasons why clients might want to wait a while before

submitting their applications for loan forgiveness.

You may recall that the forgiveness loans were already eased. Initially,

forgiveness depended on using 75% of the loan for payroll expenses. But

then it was reduced to 60%. Could this be changed? And what's

considered to be payroll expenses may also change.

Recently the SBA said vision and dental benefits are payroll expenses.

What's more, there are rumors that the SBA may give full loan

forgiveness for small loans, perhaps those under $20,000 or so. The best

advice we can give our clients is to wait and see.

WILLIAMS: In August 2020, the IRS announced that it has begun sending out interest

payments to those individuals who received refunds and filed tax returns

after April 15 but before July 15. The IRS explains in the news release

why the payments are being made. The COVID-19-related delay in the

due date announced by the IRS in Notice 2020-23 triggered this special

interest rule as follows:

“This provision is different from the long-standing 45-day rule, generally

requiring the IRS to add interest to refunds on timely-filed refund claims

issued more than 45 days after the return due date.

Instead, this year’s COVID-19-related July 15 due date is considered a

disaster-related postponement of the filing deadline. Where a disaster-

related postponement exists, the IRS is required, by law, to pay interest,

calculated from the original April 15 filing deadline, as long as an

individual files a 2019 federal income tax return by the postponed

deadline − July 15, 2020, in this instance.

This refund interest requirement only applies to individual income tax

filers − businesses are not eligible.”

The IRS has been busy getting ready for the next filing season. It has

released a lot of draft forms. While the details don't really matter to us

because we prepare and file returns on our computers, it is helpful to

know what's changed. Barbara Weltman starts with the basic forms, Form

1040 and 1040SR.

WELTMAN: The basic tax forms, 1040 and 1040SR that will be used for 2020 are

different from the 2019 version.

You can forget about the postcard return we'd heard about. The 1040SR is

four pages. That's because it added lines, the large print, and the table

with the standard deduction amounts.

3–24

video transcript video transcript

The 1040 and 1040SR have new lines for the charitable contribution

deduction for non-itemizers, the recovery rebate credit for those who

received economic impact payments less than what they were entitled to,

and estimated tax payments, which used to be on Schedule Three.

But now on the 2020 Schedule Three there's a new line for qualified sick

and family leave credits for household employers and self-employed

individuals. Amounts taken from Schedule H for household employers

and a new form 7202 for self-employed people. What's more, virtual

currency holdings is now on page one of the return.

WILLIAMS: And how do the new forms and schedules deal with deferral of the

employer portion of social security in self-employment tax?

WELTMAN: As discussed, self-employed individuals can elect to defer the employer

portion of social security taxes in self-employment tax, 6.2%. Remember

employers could claim the deferral through paying and depositing less

employment taxes.

Self-employed individuals must address the deferral on their income tax

return. On Schedule 1 related to the deduction for self-employment tax it

says, "Deductible part of self-employment tax." Remember it used to be

one-half of self-employment tax. Schedule SE no longer has a long and

short form. Instead it has parts one for figuring the tax, part two for

figuring optional payments of the tax, and part three for figuring the

maximum amount of deferral.

The deferred amount is entered as an “other tax payment” on Schedule 3.

It's all rather confusing, but thankfully software knows where things go.

The point for us to discuss with our clients is whether to do deferral.

If they've underpaid estimated taxes for 2020, deferral can help minimize

or avoid penalties. But if they've paid enough they may want to let it go

and not have to worry about making up the deferred amount in 2021 and

2022. Even if they're out of business by then, the obligation for the

deferred amount won't go away.

WILLIAMS: This year there was a tremendous problem with mailed in checks because

IRS personnel weren't there to open envelopes. So, are taxpayers going to

be penalized?

WELTMAN: The IRS announced that it would temporarily stop mailing notices to

taxpayers with balances due. So, CP501, CP503, and CP504 won't be

going out to taxpayers because they may have mailed in their payments

which are still sitting unopened. I'm sure the government is anxious to get

to these payments. There's a lot of revenue just sitting around. I should

also mention that the IRS is providing relief from bad check penalties for

dishonored checks received between March 1 and July 15 due to delays in

IRS processing.

WILLIAMS: The IRS also announced it was issuing interest on tax refunds. But, isn't

the IRS required to do so?

WELTMAN: The IRS is required to issue interest on tax refunds when it pays them

more than 45 days after the return has been filed. But this year we had the

automatic extension to July 15 where a disaster related postponement

exists, like what we had this year, the IRS is required by law to pay

interest calculated from the original April 15 filing deadline as long as an

individual filed a 2019 federal income tax return by the postponed

deadline of July 15, 2020.

CPAR/OCT. ‘20

3–25

video transcript video transcript

This required interest on refunds applies only to individual income tax

returns, not to corporations. The IRS gave 13.9 million taxpayers interest

on their tax refunds.

In most cases this happened through direct deposit just like the underlying

refunds. We'll have to keep these interest payments in mind for 2020

returns because they're taxable income.

WILLIAMS: The IRS hasn't stopped auditing returns, although the numbers are way

down. Barbara discusses why one of the key areas of interest when it

comes to audits concerns partnerships.

WELTMAN: As you know, the Bipartisan Budget Act created a centralized partnership

audit regime. Basically, the IRS audits the partnership and makes

adjustments at the partnership level, although the partnership can opt to

push them out to partners.

However, eligible partnerships can opt out of the BBA regime. An eligible

partnership is one with 100 or fewer partners, all of whom are either

individuals, C corporations, foreign entities that would be treated as C

corporations if they were domestic, S corporations, or estates of deceased

partners. In other words, small partnerships can opt out.

The IRS has a new website for the BBA centralized partnership audit

regime. This is a one-stop location that the IRS says is for anything BBA

related. Yes, it clearly explains the centralized partnership audit regime,

but let me tell you that it doesn't include links to recent exceptions from

amending partnership returns for partnerships subject to the BBA regime.

For example, it doesn't link to Rev. Proc. 2020-23, which allows such

partnerships to file amended returns to take advantage of retroactive

changes in the CARES Act, such as the fix for qualified improvement

property. Let's hope the landing page is expanded to include all relevant

information.

WILLIAMS: COVID-19 made what we thought was impossible, possible! It put in

place policies and procedures that were going to take years and meetings

upon meetings until they were going to be decided on and implemented.

Many were surprised to see the IRS following the steps of all businesses

and making adjustments for the taxpayers.

On August 28, 2020, the IRS announced several forms eligible to be

signed via electronic signatures and on September 10, 2020, six more

forms were added.

The initial memorandum on August 28, 2020, was not amended; it was

simply revised to add the new forms. It also includes the following

information regarding the types of electronic signature technologies that

can be used for this program:

“Electronic and digital signatures appear in many forms when printed and

may be created by many different technologies. No specific technology is

required for this purpose during this temporary deviation.”

The new forms added to the list are:

lForm 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return;

lForm 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax

Return;

lForm 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;

3–26

video transcript video transcript

lForm 1120-ND, Return for Nuclear Decommissioning Funds and

Certain Related Persons;

lForm 3520, Annual Return To Report Transactions With Foreign

Trusts and Receipt of Certain Foreign Gifts; and

lForm 3520-A, Annual Information Return of Foreign Trust With a

U.S. Owner.

These forms joined the following forms initially qualified for digital

signatures:

lForm 3115, Application for Change in Accounting Method;

lForm 8832, Entity Classification Election;

lForm 8802, Application for U.S. Residency Certification;

lForm 1066, U.S. Income Tax Return for Real Estate Mortgage

Investment Conduit;

lForm 1120-RIC, U.S. Income Tax Return For Regulated Investment

Companies;

lForm 1120-C, U.S. Income Tax Return for Cooperative Associations;

lForm 1120-REIT, U.S. Income Tax Return for Real Estate Investment

Trusts;

lForm 1120-L, U.S. Life Insurance Company Income Tax Return;

lForm 1120-PC, U.S. Property and Casualty Insurance Company

Income Tax Return; and

lForm 8453 series, Form 8878 series, and Form 8879 series regarding

IRS e-file Signature Authorization Forms.

These forms are accepted with digital signatures as long as they are

mailed on or before December 31, 2020.

One aspect of telecommuting is handling Tax Court cases. Barbara gives

us her insights about changes in procedures at the Tax Court.

WELTMAN: The tax court made several adjustments to its procedures to enable cases

to proceed during the pandemic. Let me run through them.

First, the court will accept electronically filed stipulated decisions bearing

digital image signatures. The court is revising the practitioner's guide to

electronic case access and filing to reflect this adjustment. There are also

some changes for the submission of documentary evidence. The court

posted the changes on its website. The same is true for procedures relating

to subpoenas. And it updated its administrative order 2020-03 to clarify

that limited entries of appearance may be filed in cases that were on

canceled trial sessions. If you practice before the tax court you should

review the adjustments in detail.

WILLIAMS: Filing things electronically has become the norm during the pandemic.

But until now we couldn't do this for amended income tax returns for

individuals. Barbara gives us an update on 1040-X filings.

WELTMAN: About three million individuals file Form 1040-X each year. Until now

this had to be done on paper. But the IRS announced that amended returns

for individuals can now be e-filed using commercial tax filing software.

This should simplify the amended return process, avoid mistakes, and

hopefully lead to quicker IRS responses.

CPAR/OCT. ‘20

3–27

video transcript video transcript

For example, if an individual files an amended return to claim a refund, it

may come quicker than with a paper amended return. But the IRS noted

that e-filing will only apply to amended returns for 2019. I guess

eventually they'll expand the program to allow e-filing of amended

returns for earlier years not yet closed by the statute of limitations.

WILLIAMS: Barbara Weltman gives us an update on other changes for filings.

WELTMAN: As you know, the 1040s already use electronic signatures when the

returns are filed electronically. The taxpayer uses a self-selected PIN if

the taxpayer self files. If the return is filed by a paid preparer, the

professional's PIN is used. Now the IRS is allowing the use of digital

signatures on certain forms that can't be filed electronically.

The forms can then use a digital signature on Form 3115 for a change in

accounting method, Form 8832 for entity classification election, and

certain other forms.

This applies only if the forms are mailed by December 31, 2020. Whether

the use of e-signatures will be allowed after this date is unclear. The IRS

says it's monitoring this temporary option.

WILLIAMS: One of the ongoing points of political contention is the SALT cap, the

$10,000 limit on the deductions of state and local taxes by individuals

who itemize rather than taking the standard deduction. Several states,

including Connecticut, New Jersey, and New York created a workaround

using charitable contributions. The IRS pushed back.

WELTMAN: Some states have given their residents state and local income tax credits

for donations to certain funds. The IRS previously ruled and then issued

proposed regulations stating that where there's a quid pro quo no

charitable contribution deduction is allowed for federal income tax

purposes.

Last June there were final regulations on this, but now we have more final

regulations clarifying a number of points. For example, the new final regs

make it clear that the quid pro quo principle applies whether the party

doing it is the donee or a third party.

WILLIAMS: But isn't there a safe harbor that individuals can use to claim charitable

contribution deductions despite a quid pro quo?

WELTMAN: Under the safe harbor the SALT credits received for the donation can be

disregarded if they don't exceed 15% of the taxpayer's payment. But the

new regs make it clear that the safe harbor only applies to payments of

cash and not property.

WILLIAMS: Is it different for businesses? Barbara discusses the treatment for

businesses that make certain contributions and receive state and local tax

credits.

WELTMAN: When it comes to businesses, C corporations and specified pass-through

entities, it's different. The regs make it clear that payments are deductible

as ordinary and necessary business expenses. They are not treated as

charitable contributions.

But for owners of these specified pass-throughs the safe harbor doesn't

apply if the credits reduce state and local tax. Let me clarify what's meant

by specified pass-through entities. These are entities that are regarded for

all federal income tax purposes as separate from their owners and state

and local taxes imposed directly on the entities for carrying on a trade or

business. A good example of a specified pass-through is a limited liability

3–28

video transcript video transcript

company. I suggest you go back to guidance issued last year in Rev. Proc.

2019-12, which contains a number of good examples of how this works.

WILLIAMS: But can some payments to corporations by states or cities be taxable?

WELTMAN: States often provide economic incentives to businesses that relocate and

create new jobs to boost the local economy. Incentives may be tax breaks

or grants. A recent appellate court focused on New Jersey's cash grants

given without restriction on their use to businesses that would relocate or

expand and create a certain number of high paying jobs.

The grants were a set percentage, 30% to 80% of state income tax

withholding on wages. The question before the court was whether the

grants were contributions to the corporation's capital under Code Section

118, which could mean the grants were excludable from gross income or

taxable. The tax court said they were contributions to capital, but the

Third Circuit reversed. The reason why the appellate court held the grants

to be taxable was the discretion that the company had with respect to the

disbursements. There were no restrictions. It could use the money in any

way it wanted as long as it maintained a certain number of employees in

the state for a certain period of time.

The Tax Cuts and Jobs Act specifically amended Code Section 118 to

exclude from the definition of contributions to capital any contributions

by a government entity. So, we're not likely to see similar cases in the

future. But companies that have previously received tax incentives to

relocate may be on the IRS's radar.

segment four segment four segment four

Segment Four

CPAR/OCT. ‘20

4–1

segment four segment four segment four

Data Validation & Reporting Excellence –

The Future of Corporate Responsibility

Segment

Overview:

Field of Study:

Recommended

Accreditation:

Reading

(Optional for

Group Study):

Running Time:

Video

Transcript:

Course Level:

Course

Prerequisites:

Advance

Preparation:

Expiration Date:

Accounting

December 12, 2021

Work experience in financial reporting or accounting, or an

introductory course in accounting.

None

1 hour group live

2 hours self-study online

Update

“As ESG accreditation evolves, don’t forget the Principles for

Responsible Investment”

“What registered investment advisers can expect from the SEC in a

changed economy”

“As private equity firms hold onto investments, investors get

restless”

By Anthony DeCandido

“Technology to improve ESG disclosure”

By Anoop Khanna

See page 4–12.

See page 4–20.

35 minutes

Environmental, social and governance (ESG) criteria may not be a

new set of standards but it is gaining more and more ground

amongst private equity companies and investors as it helps screen

potential investments. Modern investors reevaluate and challenge

traditional investment approaches as the global environment

evolves and becomes more complex. ESG criteria assess a

company’s values and behaviors and help investors see if these

values match their own. Anthony DeCandido, financial services

partner and senior financial services analyst for RSM US LLP,

discusses the ESG criteria in further detail and its objectives.

Learning

Objectives:

Upon successful completion of this segment, you should be able to:

lRecognize how the modern investors evaluate investment

opportunities,

lIdentify the various boards and initiatives related to ESG and

understand the differences and similarities,

lRecognize the best practices for ESG reporting, and

lIdentify what executives need to know and what they need to

avoid.

4–2

outline outline outline outline outline

Outline

A. Why Evaluate ESG?

i. Prosocial behaviors drive better

results

ii. Influencers can be associated with

your organization

iii. Consumers are interested in

lWhy an organization exists

lWhat organizations do to conduct

business

B. Dodd-Frank Act

i. Created a high level of transparency

for investors

C. Challenges in the Market Today

i. Absence of a universally accepted

framework

lPrevents companies from

conforming to societal or

business changes

D. Reasons to Establish ESG Criteria

i. Peer pressure or trend

ii. Change in demographics –

millennials are

lMission based

lAligning beliefs and value

systems to organizations they

associate with

iii. ESG is here to stay

E. Non-ESG Believers

i. Drive high financial return

ii. Give most of that money to a cause

II. Transparency and External Pressures

A. The Modern Investor

i. Reevaluates and challenges

traditional investment approaches as

the global environment evolves

ii. Looks for higher standards of

reporting

B. SEC Disclosure Framework for ESG

i. Seeks to provide investors with

lMaterial

lComparable

lConsistent information

C. Investors’ Class Prosocial Behavior

Drivers

i. Environments they operate in

ii. Social causes

iii. Governance topics

D. ESG Breakdown

i. Environmental

lBeing good stewards to the

environment

ii. Social

lHow we are treating employees,

customers, suppliers

lDiversity and inclusion

iii. Governance

lExecutive level compensation

lBoard composition

I. ESG and the Modern Investor Perspective

CPAR/OCT. ‘20

4–3

Outline (continued)

outline outline outline outline outline

A. Sustainability Accounting Standards

Board

i. Enables businesses to

lIdentify

lManage

lCommunicate

lFinancially material sustainability

information to investors

ii. Has developed a complete set of 77

industry standards

iii. Provides guidance

iv. Has identified issues considered

financially material

B. Global Reporting Initiative

i. Helps businesses and governments

worldwide understand and

communicate their impact

lOn critical sustainability issues

ii. Empowers decisions that create

social, environmental and economic

benefits for everyone

iii. GRI standards focus on an

organization’s material topics

C. Goals of SASB & GRI Collaboration

i. Provide clarity in ESG reporting

ii. Help investors & consumers

understand similarities & differences

between the two sets of standards

D. Task Force on Climate-Related

Financial Disclosures

i. Focuses on developing voluntary,

consistent climate-related financial

disclosures

ii. Asks organizations to report on four

categories:

lGovernance

lStrategy

lRisk management

lMetrics & targets

III. ESG Boards, Initiatives and Taskforces

A. Available ESG Standards – Codes

i. SASB – 77 sets of standards

ii. SDG – 17 codes

B. Best Practices for ESG Reporting

i. Align ESG metrics to your missions

& values

ii. Develop policies & procedures

iii. Develop levels of governance

C. Understanding Your End Stakeholders

i. Public Companies

lStakeholders & investors

ii. Private Investment Company

lInvestors

lTalent you wish to attract

lVendors you align yourself with

lMarketing professionals

lAnything & anyone

IV. ESG Reporting

4–44–4

outline outline outline outline outline

Outline (continued)

A. Survey Findings Included

i. Written objectives & performance

metrics for stakeholders

lMore likely to exist at larger

companies

ii. Only 39% of executives are familiar

with ESG criteria

lSame percentage in 2018

B. What Executives Need to Know

i. They are not alone

lTheir peers have the same

questions and concerns

ii. There are people to assist along the

way

iii. Determine if they need to buy or

build when they start their journey

C. What Executives Need to Avoid

i. Greenwashing

ii. False advertising – do what you say

you are doing

iii. Bad actors – know who you are

doing business with

VI. Executive Roles and Key Things to Remember

A. ESG Values & Behaviors

i. Give a sense of purpose

B. How RSM U.S. Adds Value to Their

Clients

i. Employing data scientists who

lOrganize clients’ data

lCreate insights & predictions

ii. Benchmarking

lMeasuring information against

peers

iii. Assisting with reporting

C. Steps RSM U.S. Takes with ESG

i. Gives priority to

lPeople

lDiversity inclusion

ii. Minimizes their carbon footprint

V. Establishing ESG Criteria and Adding Value

CPAR/OCT. ‘20

4–5

Outline (continued)

outline outline outline outline outline

A. Ways to Avoid Picking & Choosing

Metrics

i. Showcasing the journey

lHelps improve business practices

ii. Remediation

lHelps respond appropriately to

failed results

“It doesn't have to be depicted as

a terrible thing. It could be

depicted as something that

allows for business

improvement.”

— Anthony DeCandido

B. Anthony DeCandido’s Views on

Outliers

i. Opportunity to learn something

unique about a company

ii. Provide insights

iii. Help understand the nature of those

transactions

C. Impact of ESG Reporting Templates

i. Improve education and awareness

ii. Can create confusion

lCustomizing framework can be

daunting

D. ESG & Value Creation

i. It can lead to improved business

results

ii. No empirical data to support that

ESG drives better financial results

“… this is going to be centered

around data and the ability to

benchmark because … if you're not

able to benchmark the impact that

you're having, then why bother in

the first place?”

— Anthony DeCandido

VII. Leveraging ESG Metrics and Reporting

4–6

lAs the Discussion Leader, you should

introduce this video segment with words

similar to the following:

“In this segment, Anthony DeCandido

discusses environmental, social and

governance (ESG) criteria in detail and

looks at its objectives."

lShow Segment 4. The transcript of this

video starts on page 4–20 of this guide.

lAfter playing the video, use the

questions provided or ones you have

developed to generate discussion. The

answers to our discussion questions are

on pages 4–8 and 4–9. Additional

objective questions are on pages 4–10

and 4–11.

lAfter the discussion, complete the

evaluation form on page A–1.

discussion questions discussion questions

4. Data Validation & Reporting Excellence –

The Future of Corporate Responsibility

1. How does the modern investor evaluate

investment opportunities? What new

criteria have you noticed are important to

today’s investor?

2. What are the ESG criteria and why is it

important for companies to evaluate

ESG? How is your organization

evaluating its ESG data?

3. What are the reasons an organization

should establish ESG criteria? Why or

why hasn’t your organization established

ESG criteria?

4. What are the initiatives of various boards

related to ESG?

5. What are the best practices for ESG

reporting? Who is your organization’s

end stakeholder?

6. What are Mr. DeCandido’s views on

what executives need to know and what

they need to avoid? How successful has

your organization been at initiating ESG

objectives?

Discussion Questions

You may want to assign these discussion questions to individual participants before viewing

the video segment.

Instructions for Segment

Group Live Option

For additional information concerning CPE requirements, see page vi of this guide.

CPAR/OCT. ‘20

4–7

discussion questions discussion questions

7. What are some ways to avoid managers

picking and choosing metrics that will

manipulate data results? How can you

handle outliers?

Discussion Questions (continued)

4–84–8

Suggested Answers to Discussion Questions

4. Data Validation & Reporting Excellence –

The Future of Corporate Responsibility

1. How does the modern investor evaluate

investment opportunities? What new

criteria have you noticed are important

to today’s investor?

lThey reevaluate and challenge

traditional investment approaches as

the global environment evolves and

becomes more complex

lThey look for higher standards of

reporting

lThey drive prosocial behaviors as it

relates to:

vEnvironments in which they

operate

vSocial causes

vGovernance topics

lParticipant response based on

personal/organizational experience

2. What are the ESG criteria and why is it

important for companies to evaluate

ESG? How is your organization

evaluating its ESG data?

lEnvironmental

vBeing good stewards in the

environments in which we operate

vExamples – water usage,

emissions, carbon footprint

lSocial

vHow we treat our employees,

customers, and suppliers

vHow we organize as far as

diversity and inclusion

lGovernance

vExecutive level compensation

vBoard composition

lESG should be evaluated because:

vProsocial behaviors drive better

results

vInfluencers can be associated with

your organization

vConsumers are interested in:

kWhy an organization exists

kWhat organizations do to

conduct business

lParticipant response based on

personal/organizational experience

3. What are the reasons an organization

should establish ESG criteria? Why or

why hasn’t your organization established

ESG criteria?

lPeer pressure

lTrends

lPrimary reason is the change in

demographics because millennials

are:

vMission-based

vAligning beliefs and value

systems to organizations with

which they associate

vIncreasingly influential with their

investor base

lESG is here to stay

lParticipant response based on

personal/organizational experience

4. What are the initiatives of various

boards related to ESG?

lSustainability Accounting Standards

Board (SASB)

vAn independent standards board

that is accountable for due

process, outcomes, and

ratification of the SASB standards

vEnables businesses to identify,

manage, and communicate

financially material sustainability

information to investors

vDeveloped a complete set of 77

industry standards available on

their website

vProvides guidance

vIdentifies issues considered

financially material

lGlobal Reporting Initiative (GRI)

vHelps businesses and

governments worldwide

understand and communicate their

impact on critical sustainability

issues

vSuch as climate change, human

rights, governance and social

well-being

suggested answers to discussion questions

CPAR/OCT. ‘20

4–9

Suggested Answers to Discussion Questions (continued)

vMission is to empower decisions

that create social, environmental,

and economic benefits for

everyone

vStandards represent global best

practices that also focus on an

organization’s material topics and

related impacts

lSASB & GRI collaboration

vProvide clarity in ESG reporting

vHelp investors and consumers

understand similarities and

differences between the two sets

of standards

lTask Force on Climate-Related

Financial Disclosures (TCFD)

vEstablished by the Financial

Stability Board (FSB)

vFocuses on developing voluntary,

consistent climate-related

financial disclosures

vAsks organizations to report on

four categories related to climate

change:

kGovernance

kStrategy

kRisk management

kMetrics and targets

lRecommends that companies develop

a climate scenario analysis testing the

resilience of their strategies

5. What are the best practices for ESG

reporting? Who is your organization’s

end stakeholder?

lAlign ESG metrics to your missions

and values

lDevelop policies and procedures

lDevelop levels of governance

lDetermine KPIs that are unique and

relevant to the particular business

and industry

lUnderstand who is your end

stakeholder

vInvestor

vTalent you wish to attract

vVendors that you align with

vMarketing professionals

vAnyone else

lParticipant response based on

personal/organizational experience

6. What are Mr. DeCandido’s views on

what executives need to know and what

they need to avoid? How successful has

your organization been at initiating ESG

objectives?

lExecutives need to know

vThey are not alone – peers have

the same questions and concerns

vThere are people to assist along

the way

vWhether they need to buy or build

when they start their journey

kBuy meaning aligning with

reputable consultant

kBuild if existing team has time

and level of sophistication

lExecutives need to avoid

vGreenwashing

vFalse advertising – do what you

say you are doing

vBad actors – know who you are

doing business with

lParticipant response based on

personal/organizational experience

7. What are some ways to avoid managers

picking and choosing metrics that will

manipulate data results? How can you

handle outliers?

lWays to avoid picking and choosing

metrics

vShowcasing the journey

kUnderstand that we aren’t

perfect

kOpportunity to improve

business practices

vRemediation

kHelps respond appropriately to

failed results

kHave an appropriate response

that they can communicate to

the market

lHandling outliers

vOpportunity to learn something

unique about a company

vProvide insights

vHelp understand the nature of

those transactions

suggested answers to discussion questions

4–10

objective questions objective questions

1. The SEC rule of thumb requires

companies to restate prior period

financial statements in the event of an

error that has an impact of 5% or more

on:

a) earnings

b) assets

c) equity

d) cash flows

2. Earnings management:

a) is NOT considered financial statement

fraud

b) is typically performed by non-

management personnel

c) exists partly because of the flexibility

allowed in generally accepted

accounting principles

d) is currently NOT a priority for the

Securities and Exchange Commission

3. Marvell Entertainment was recently fined

for:

a) pulling revenues from future into

present quarters only

b) failing to pulling in offsetting

expenses only

c) both A and B

d) obstructing an SEC investigation

4. Which of the following lines of

communication is considered necessary

to prevent earnings management?

a) communication between the financial

professionals and senior executives

only

b) communication between the company

and its outside auditors only

c) communication between the outside

auditors and audit committee only

d) all of the above lines of

communication are considered

necessary to prevent earnings

management

5. Which of the following is NOT a reason

given that the PCAOB should NOT

conduct public company audits?

a) lack of qualified professionals

b) lack of resources

c) the need to maintain independence

d) the PCAOB should NOT be involved

in the audit process

6. The new rules related to Critical Audit

Matters (CAMs) are effective for large

accelerated filers:

a) after January 1, 2019

b) after January 1, 2020

c) after December 15, 2020

d) after June 30, 2019

7. With respect to the whistleblower

provisions under the Dodd-Frank Act:

a) individuals are no longer allowed to

collect whistleblower awards

b) the Act requires arbitration of

whistleblower claims

c) the Act allows retaliation by

employers against whistleblowers in

certain circumstances

d) whistleblowers' identities are NOT

protected under the Act

8. As a result of the implementation of ASU

2018-15, companies should now consider

which of the following considerations

related to their transactions and

agreements?

a) Accounting implications of a

particular transaction

b) SEC implications

c) Tax implications

d) all of the above

You may want to use these objective questions to test knowledge and/or to generate further

discussion; these questions are only for group live purposes. Most of these questions are based

on the video segment, a few may be based on the reading for self-study that starts on page

4–13.

4. Data Validation & Reporting Excellence –

The Future of Corporate Responsibility

Objective Questions

4–104–10

CPAR/OCT. ‘20

4–11

objective questions objective questions

9. Earnings management encompasses:

a) both accounting earnings

management and real earnings

management

b) accounting earnings management

only

c) real earnings management only

d) asset misappropriations

10. One of the reasons that the validity of

the current system of utilizing

independent accounting firms to audit

public companies is being called into

question is:

a) the increase in audit fees

b) the lack of qualified audit

professionals in independent firms

c) the inability of independent audit

forms to obtain cooperation from

their audit clients

d) the significant increase in

accounting earnings management

related actions brought by the SEC

Objective Questions (continued)

4–12

Self-Study Option

Reading (Optional for Group Study)

reading reading reading reading

AS ESG ACCREDITATION EVOLVES, DON’T FORGET THE

PRINCIPLES FOR RESPONSIBLE INVESTMENT

FEB. 11, 2020 BY ANTHONY

DECANDIDO

Source: https://realeconomy.rsmus.com/as-

esg-accreditation-evolves-dont-forget-the-

principles-for-responsible-investment/

As socially responsible investing has grown

in recent years, so too have the number of

organizations looking to create some sort of

accreditation for investors.

Groups like the Sustainable Accounting

Standards Board, the Global Reporting

Initiative and CDP Global are looking for

ways to provide a sort of Good

Housekeeping Seal of Approval that

reassures investors their money is being put

to work in a way that they intend.

One of the oldest, and most established, of

these is the Principles for Responsible

Investment, a United Nations-backed effort

that demonstrates an organization’s

commitment to responsible investment

practices.

Established in 2006, PRI has grown to have

nearly 2,500 signatories including asset

owners, asset managers and service

providers. In all, they represent more than

$80 trillion of assets under management,

making PRI the largest form of accreditation

in the sustainability sector.

Signing the principles is a way to

demonstrate an organization’s commitment

to responsible investment practices. It’s a

chance to align one’s missions and values to

those who receive, deploy or service capital.

It’s also a sign of intent: Many sign the

principles, or plan to sign them, because

they aspire for a more sustainable

organizational and global financial system.

Misconceptions

But while the popularity of PRI is

undeniable, many middle-market

professionals still misunderstand its core

tenets. There are several misconceptions:

The principles themselves are voluntary.

Rather than PRI requiring certain practices

lIn order to ensure adherence to

NASBA guidelines regarding self-

study, the CPA Report and CPA Report

Government/Not-for-Profit Self-Study

Professional Education Centers are no

longer available. Customers should

contact their company administrators

for information on taking course exams

and receiving CPE credit for the

courses.

lCustomers may contact Kaplan

Financial Education at

cpesupport@kaplan.com to obtain

certificates previously earned through

the CPA Report Self-Study and CPA

Report Government/Not-for-Profit Self-

Study Professional Education Centers.

lCustomers interested in the self-study

format of the CPA Report can find

information on Kaplan Financial

Education's self-study libraries at

Online Accounting CPE Courses.

CPA Report Gov/Not-for-Profit Update

CPAR/OCT. ‘20

4–13

surrounding responsible investing, PRI

instead applies a framework for what an

organization intends to do. Think of these

rules as more aspirational than foundational.

Organizations look to improve in areas like

climate change, human rights, and board

diversity and structure to drive better

investment outcomes.

Many middle market organizations believe

that they must already have responsible

investment practices in place today, rather

than to use the framework to improve

responsible investment practices for the

future. In reality, the PRI approach has

attracted all kinds of organizations oriented

to sustainability, both in the early stage or

late stages of development. Just because a

company doesn’t have a fully functioning

responsible investment strategy doesn’t

mean the company shouldn’t aim to achieve

its principles.

For this reason, certain accommodations are

made for first-year signatories. The first

year of membership does not require

reporting disclosures, meaning that most

organizations formally report after 12 to 24

months of signing up with PRI. With the

number of signatories increasing by

approximately 25% from 2018 to 2019, it’s

no surprise that the number of inquiries for

reporting instruction, too, has increased.

PRI’s solution – the Sustainable

Development Goals – articulates 17 such

goals including poverty and hunger,

education, clean water and energy,

economic growth and industry and

innovation.

Many of the PRI disclosures can be made

private. Although signatories must report

all information included within its

framework, certain information can be held

private, protecting those who do not yet

demonstrate best-in-class responsible

investing practices. PRI instead offers a

platform to develop community with other

like-minded organizations inside and

outside an industry, to learn from one

another, and to focus on the development of

sound responsible investment practices. For

those who are far more ambitious or who

have best-in-class attributes, PRI offers the

ability to benchmark among its PRI peers a

valuable exercise for a committed PRI

signatory.

PRI doesn’t independently validate the

data it receives. The lack of data quality

and inconsistency in its presentation is a

major challenge for decision-makers. This

creates a major void for investors to

evaluate actual performance amongst peers.

And worse, many people still are unclear on

data terminology.

reading reading reading reading

Source: Bloomberg

4–14

A whole new industry of accreditation has

emerged, where asset managers and owners

are requesting data validation to support

their investment standing. Increased

regulatory and stakeholder pressures and

rising social and environmental concerns

will continue to push organizations to adopt

reporting practices. But the market will need

certification no different from organizations

that prepare financial information and seek

independent audits.

A chance to evaluate

progress

So while responsible investment reporting

continues to evolve, PRI remains a notable

option.

PRI offers the chance for investors to

evaluate an organization’s responsible

investment progress against an industry

framework, benchmark the performance of

public data, and then to summarize its

activities for stakeholders.

Signatories report how they will incorporate

ESG issues into investment analysis and

decision-making processes, including the

processes and controls that it will follow.

Most important, they report activities and

progress made by each principle.

In the end, this maintains accountability,

standardized reporting transparency and

regular feedback that help an organization

learn and develop.

reading reading reading reading

WHAT REGISTERED INVESTMENT ADVISERS CAN EXPECT

FROM THE SEC IN A CHANGED ECONOMY

JUN. 2, 2020 BY ANTHONY DECANDIDO

SOURCE:

https://realeconomy.rsmus.com/what-

registered-investment-advisers-can-expect-

from-the-sec-in-a-changed-economy/

Even as the coronavirus disrupts many

conventions and traditions of the financial

services industry, one regulatory ritual has

continued, albeit in digital form: the

Securities and Exchange Commission’s

compliance examinations with registered

investment advisers.

These examinations, which are now

conducted virtually by the SEC’s Office of

Compliance Inspections and Examinations,

or OCIE, have highlighted some of the new

risks faced by investment firms when it

comes to compliance in an economy

convulsed by the coronavirus.

A review of recent enforcement actions and

OCIE exam priorities offers some insight

into what areas of a business are most

exposed, and what actions may ultimately

protect the firm from investor or regulatory

backlash for any issues of noncompliance.

Among the SEC’s questions: Are a firm’s

holdings fairly valued, and is the firm able

to meet redemption requests? Have

pandemic policies been developed?

Many groups have prepared for what is the

unavoidable call or email from the SEC.

Some firms have upgraded or added talent

to their back-office compliance function,

while others have undertaken a mock

examination. Nearly all have consulted with

outside counsel.

We expect that the SEC will understand that

advisers could require more time for a

response as many managers are

experiencing profound and unexpected

business challenges amid the pandemic.

Regardless of the approach taken, here are

some of the topics the SEC may consider

during the health crisis:

lAre investment values reasonable and

is there evidence of trading on

nonpublic information? This should

come as no surprise to investment

advisers – valuation risk was always the

CPAR/OCT. ‘20

4–15

reading reading reading reading

top priority for OCIE, and the health

crisis just makes it more important given

the growing number of companies

suffering financial losses. The current

market environment heightens the risk

that a general partner might overstate

the firm’s investment values as a means

of masking poor performance. Policies

and procedures around a group’s

valuation of securities are expected to be

followed, especially amid volatile

market pricing. Changing a set valuation

policy without a supportable reason

could alert the regulators of possible

reporting fraud.This is particularly

important when investment performance

has suffered coronavirus-related losses

or when the general partners intend to

raise capital. And during the SEC’s late-

May coronavirus call, regulatory

officials cited the agency’s increased

attention to “friendly broker quotes” or

transactions among market “affiliates,”

which may suggest investments have not

been fairly valued.

With more firms struggling to perform in a

difficult market and to raise assets, the SEC

is on alert for brokers that may be

incentivized to trade using nonpublic

information. For example, looming facility

or store re-openings, pending health patents

and access to personal protective equipment

supplies are especially important in light of

the coronavirus. And the SEC even

commented on its ability to monitor bad

behavior in what has long been a favorite

communication technique on Wall Street:

the Bloomberg chat room.

lWill funds be able to meet redemption

requests? The health crisis has spooked

some investors, leaving them with a

reduced appetite for risk. While

governing documents detail internal

fund policies around investor

redemptions and restrictions, investment

managers may be faced with widespread

redemption requests as investment

values decline.

And this could lead to a scenario where

investors have little to no access to cash

during a time when they may need it the

most. Examiners will look for situations

where investment managers have strayed

from set redemption guidelines. Policies

around lock-up periods, side pocket

arrangements and notice requirements are

expected to be examined to protect investor

interests.

lHave pandemic policies been

developed? Long after COVID-19 is

brought under control, the virus will

remain a risk, particularly around weak

health systems, in areas with high

population density and poverty, and in

communities with political instability.

And the threat of another pandemic will

leave a lasting sting to savvy investors

who seek solid pandemic policies and

procedures. Business continuity plans,

market intelligence and alternative data,

and IT infrastructure and cybersecurity

may be prioritized.

These are all areas that mattered before the

onset of the coronavirus but may now matter

more. Many investors have added these

questions to their investment criteria to

assess firms’ blind spots and to determine

whether their investment strategy is worth

ascribing to. We believe the SEC will expect

groups to carefully measure these risks and

those that have already developed sound

business practices will be positioned well.

Issues will arise when there was no plan in

place, the plan is outdated or no longer

relevant, or, worse, when a good plan was

not followed.

The takeaway

At the end of the day, the SEC aims to

ensure transparency and clear and consistent

reporting. By putting in place institutional-

quality processes throughout the

organization, investment firms better ensure

compliance with regulatory requirements.

4–16

MAY. 27, 2020 BY ANTHONY DECANDIDO

SOURCE:

https://realeconomy.rsmus.com/as-private-

equity-firms-hold-onto-investments-

investors-get-restless/

The coronavirus pandemic hasn’t slowed

interest by private equity firms putting their

cash to work in distressed firms. Although

deal activity was down from March to April,

general partners in private equity firms are

still searching for value wherever they can

find it.

And they have the means to do it. After

years of solid fundraising – which resulted in

$316 billion of capital raised in 2019,

according to PitchBook – private equity

funds are overstocked with capital and are

under pressure to put large amounts of

money to work.

But as that stockpile has increased, threats of

the coronavirus have continued to mount,

creating uncertainty and leaving private

equity firms in a holding pattern.

It’s creating a push and pull in a private

equity market that has switched from what

was unmistakably a seller’s market in 2019

and before, to a buyer’s market in early

2020.

At issue are the lower valuations of

companies that are suffering COVID-related

losses. Sending a lifeline now offers general

partners the largest long-term financial

upside and helps drive the type of returns

that their investment base mandates.

But at the same time, the lower valuations

are making private equity firms more

reluctant to sell the companies they do

control as they wait for the market to

recover. And in the near term, general

partners will need to take steps to recession-

proof and fortify business operations at the

portfolio level. Addressing working capital

will be an immediate priority.

The result has been a notable change in

private equity holding periods and the

number of investments to exits that general

partners have made.

As of April, the median investment holding

period was 5.43 years, a 9% increase from

2019, and the highest reading since 2014,

when the median holding period was 6.16

years. An increased reading implies an

unwillingness of general partners to exit

investment holdings while a decreased

reading suggests a willingness to exit

investment holdings.

From 2015 to 2018, a bull economy had

private equity firms exiting positions more

quickly, with holding periods ranging from

5.10 to 5.24 years, compared to 2012 to

2014, when those ranges were 5.36 to 6.16

years.

As holding periods have increased during

the coronavirus…

reading reading reading reading

AS PRIVATE EQUITY FIRMS HOLD ONTO INVESTMENTS,

INVESTORS GET RESTLESS

Source: PitchBook

CPAR/OCT. ‘20

4–17

This implies that private equity firms with set

three- to five-year holding periods dictated

by their partnership agreements held onto

their investments longer following the Great

Recession, but sought swifter exits as the

economy recovered and valuations increased.

But the recent reading hints at general

partners’ fading confidence to strike

favorable exit terms. General partners are

instead seeing the value of holding onto

quality companies for as long as is needed to

create maximum upside for fund

performance.

This dynamic is reflected in another

measurement used in tracking changes in

general partner investment sentiment –

known as private equity investment-to-exit

ratios – that further demonstrates the ill

effects of the health crisis.

From January to April, 1,231 investments

were made, with only 238 exits realized,

representing an implied ratio of 5.2x, the

highest such reading over the past 10 years.

What’s more, 283 investments were made

and only 42 investment exits took place

during March, or an implied ratio of 6.7x,

compared to a reading of 4.7x in January and

February, respectively.

… the investment-to-exit ratio has also risen

This suggests that general partners were

more willing to put money on the table for

companies with a perceived upside versus

taking money off the table for companies that

had not yet realized their investment

potential.

Again, general partners observed fewer

favorable exits and instead focused on their

current portfolio of companies that required

active management to slow COVID-related

losses. And as many buyout companies

continue to struggle, general partners will

continue to make strategic add-ons to salvage

those deals that were already made rather

than pursuing exits on companies that are

enduring financial harm.

Key takeaways

lGeneral partners must remain focused on

their founding purpose – to generate

long-term returns – but will contend with

restless limited partners who increasingly

request that capital be deployed. The

general partners will seek answers to

slowing short-term returns, just as

investors have in public markets.

lGeneral partners will need to work

closely with their limited partners to

renegotiate investment periods where

needed to provide ample time to make

measured investment decisions. The

reading reading reading reading

Source: PitchBook

4–18

A new report has called for

technology and unified regulatory

guidelines to make ESG disclosure

efficient and actionable.

By Anoop Khanna

Source: EBSCO

This article is for educational use only.

Please do not use, distribute or share outside

this course.

Publication in June 2020 of a new report

‘ESG in China: Current State and Challenges

in Disclosures and Integration’ by Ping An

Digital Economic Research Centre is a call

for concerted efforts by all stakeholders to

improve ESG disclosures for Chinese

companies. Unified regulatory guidelines

The new report recommends that all

regulators, financial and nonfinancial, in the

country should develop unified guidelines

and come together on the most material

indicators that companies must disclose

about their ESG practices and policies.With

a unified set of guidelines, it would be easier

for companies to work on what information

is most material to their shareholders and for

credit ratings.

It is expected that the China Securities

Regulatory Commission will make

disclosure of sustainability information for

China’s listed companies mandatory by the

end of 2020. Chinese companies. Therefore,

need support with ESG data and insights on

a par with their global peers. The Hong

Kong stock exchange has already made

disclosures on climate change and social

issues mandatory from 2021. The new

requirements will be binding on companies

whose financial years begin on or after July

2020.

The report says that the country’s regulators

and stock exchanges should build on

guidelines and recommendations of

international organisations such as the

Global Reporting Initiative and the

UNsupported Principles for Responsible

Investment and integrate local market

considerations specific to Chinese

companies. “Regulators should also

encourage companies to audit their ESG

disclosures as ESG is an important

complement to the governance of Chinese

companies. Better ESG disclosures and

performance can help improve the credibility

and value of Chinese companies for global

investors.”

Chinese corporates face significant

challenges to meet stricter regulations and

investor demands for high quality ESG

disclosure. The ESG disclosure rates have,

however, been improving.

The report says, “Even though ESG

investing is still in its early stages in China,

various investment managers have started

expanding their ESG-themed research and

financial products.”

reading reading reading reading

TECHNOLOGY TO IMPROVE ESG DISCLOSURE

pendulum will likely change with more

limited partner-friendly terms and

conditions observed, including reduced

or customized management fee and

incentive fee rates.

lGeneral partners will need to consider

possible recycling provisions in instances

where limited partners are either

unwilling or unable to finance capital

commitments.

lAnd limited partners will increasingly

seek help from secondary private equity

funds that are nimble and can provide

realizations quickly.

For more information on how the

coronavirus is affecting midsize businesses,

please visit the RSM Coronavirus Resource

Center.

CPAR/OCT. ‘20

4–19

Leverage technology

As most companies have no processes for

collecting high quality ESG data, the report

recommends that companies leverage

technological solutions to collect, monitor

and learn from their ESG data.

Instead of a manual process, it should be

automated across departments. Ping An’s AI-

ESG platform has mapped more than 500

indicators from different regulatory agencies

and has helped it to automate data collection,

monitor changes and generate actionable

insights through industry peer comparison.

Ping An is today one of the first financial

services companies globally to release its

annual sustainability report this year.

Investors get more demanding

The report says the investors should

incorporate ESG information into their

investment decisions, develop ESG

investment tools, exert shareholder influence

and encourage better ESG disclosures from

Chinese companies.

Investors demand more information on the

impact companies have on the environment,

society, and their own risk management in

order to make better informed decisions

about where to invest and where they can use

their influence to improve companies’

sustainable management practices.

The report suggests that investors implement

ESG investing in three stages. Investment

managers can start from simpler processes,

such as negative and positive screening, by

leveraging several mainstream ESG rating

providers in the market.

Investors should deepen analysis and

application of ESG indicators and the ratings

framework, analyse the impact of ESG

indicators on investment decisions and

establish customised evaluation frameworks

consistent with the investors’ own investment

styles.

Finally, they should fully integrate ESG

factors into their own valuation models and

develop targeted research on important ESG

topics, such as climate change and

demographic trends. Ratings agencies need

to become more transparent

The report also says that rating agencies

should improve transparency on their

methodologies and expand their ESG data

sources to include alternative data that is not

reliant on company disclosure, to improve

objectivity and timeliness.

Even though rating providers may not be

able to disclose every detail of their

methodologies due to intellectual property

concerns, they could still be more transparent

about their indicator scope and scoring

framework.

China needs better information gathering,

measuring and reporting processes for ESG

disclosures. The report comes up with several

proposals to address these challenges.

property of Ins Communications Pte Ltd and

its content may not be copied or emailed to

multiple sites or posted to a listserv without

the copyright holder's express written

permission. However, users may print,

download, or email articles for individual

use.

reading reading reading reading

4–204–204–20

4–204–204–204–204–204–204–204–20

4–20

video transcript video transcript

SURRAN: Environmental, social and governance (ESG) criteria may not be a new

set of standards but it is gaining more and more ground amongst private

equity companies and investors as it helps screen potential investments.

Modern investors reevaluate and challenge traditional investment

approaches as the global environment evolves and becomes more

complex.

If you had to pick one word to define ESG, it would be 'data'. But where

is data coming from and how reliable and accurate is it? In publicly

traded companies, investors can view public filings, go through the

numbers and have comfort that they are not skewed. Privately held

businesses, though, are under no obligation to provide such information.

But as investors are changing and looking for higher standards of

reporting, data and data validation are evolving, and that is driving

developments in ESG.

Sustainability disclosures under current SEC regulations and guidance

are required only if "material"; in other words, if they significantly

change the information available to investors. In the absence of a

disclosure framework, they rely on third-party ESG data providers or

disclosures.

In May 2020, the SEC recommended the creation of a disclosure

framework for ESG investments that will provide investors the "material,

comparable, consistent information they need to make the investment

and voting decisions." However, if the SEC does not take the lead, on a

global level, to mandate material ESG disclosures, U.S. issuers may have

to follow standards imposed by other jurisdictions overseas that have

imposed ESG standards.

In the meantime, Europe takes the lead on ESG disclosure standards for

funds. The European Supervisory Authorities (ESAs) published a draft

that provides key provisions of the Disclosure Regulation on ESG

disclosures. The Disclosure Regulation will require financial market

professionals (FMPs) and financial advisers (FAs) to provide investors

with ESG information on certain financial products. That will enable

investors to make informed decisions. The draft is an important step

towards the finalization of the ESG disclosure rules and is important for

firms that need to prepare to be ready by March 10, 2021, when it goes

into effect. The ESAs expect stakeholders to comment on the draft by

September 1, 2020.

FOSTER: Environmental, Social and Governance (ESG) criteria assess a company's

values and behaviors and help investors see if these values match their

own. Anthony DeCandido, financial services partner and senior financial

services analyst for RSM US LLP is with us today and starts our

segment by defining the ESG criteria and discussing its objectives.

DECANDIDO: ESG stands for Environmental, Social and Governance and ESG has

become really important as of late because in particular the asset

management field has received a number of allocations from the investor

classes to drive prosocial behaviors as it relates to their environments

that they operate in, social causes and governance topics.

Video Transcript

4. Data Validation & Reporting Excellence –

The Future of Corporate Responsibility

4–20

CPAR/OCT. ‘20

4–21

video transcript video transcript

If we drill down a bit further, you think about the environment, it's this

concept of being good stewards in the environments that we operate in. It

could be simple things like water usage or emissions or carbon footprint.

When you think about it socially, it can include how we treat our

employees and our customers. What's their level of engagement? When

you go up and down the supply chain, it could be any suppliers that we

work with. How do we organize as it relates to diversity and inclusion?

And then we think about governance, it's matters like executive level

compensation, it's governance, it's board composition and so on and so

forth. These are the three prevailing topics within ESG that have caught a

lot of interest as of late.

FOSTER: Anthony discusses why ESG is important for companies to evaluate.

DECANDIDO: Most organizations still evaluate behaviors based on ROI, right? There is

this common belief in the market today that these prosocial behaviors

actually drive better business results. That's one.

Another one is we're living in a world of many influencers now and

people are very curious as to the types of organizations that they're

associating with, whether they're working there or they're engaged from a

contract or some type of agreement or it's an organization that operates in

the community that they live in, and on and on and on.

It's imperative for these organizations today to stand for something and so

many of the people in society today, they're as interested in why an

organization exists as much as what they do to conduct business.

FOSTER: Every executive talks about transparency, but is there a difference when

we talk about ESG and transparency?

DECANDIDO: I mean transparency is not a new topic. When you think back in the space

that I covered, asset management, I mean there's been regulation that

occurred in '12 Dodd-Frank, which created a high level of transparency

for the investor base. This asset management space in particular has

gotten a lot of interest from regulators and so in that theme there's this

interest of being transparent as it relates to my ESG behaviors and

stockholders are asking more questions on it. A lot of the investors are

asking more questions on it.

One of the biggest challenges in the market today is what do I offer up to

these stakeholders in light of the fact that there is no universally accepted

framework? I think that's probably the biggest challenge that a lot of the

clients that we work with face – wanting to conform to societal changes

or business changes but at the same time doing so with a universally

accepted framework and without that a lot of our clients, they're quite

curious as to what they should be doing.

FOSTER: In the last few years more and more companies are associating themselves

with a cause, supporting a philanthropic organization or a mission. But

why now? Is it peer pressure, is it a trend or is there something with

deeper roots that is here to stay?

DECANDIDO: I think that's part of the reason but the primary reason has been because of

changing demographics. The year 2019 was the first year where the

millennials surpassed the boomers as the highest percentage of the US

workforce and this demographic is quite different from their predecessors.

They are much more mission based so they're curious to align their beliefs

and value systems to the organizations that they're associating with and so

4–22

video transcript video transcript

for that reason, we don't see any reason to believe that ESG will go away

anytime soon in terms of the interest level of it but that to me is the

primary driver of all this is just changing demographics. I believe it's

here to stay.

There's still this belief of some that they would say rather than adopt

these ESG type practices, I instead want to drive the highest level of

financial profile return, and then once I do so, then in turn return the

most money to you, name the cause and so there still is this motive of

some that they're not buying into it, but I think you're going to see that

belief starting to fade out. I mean I made mention earlier like we live in

this world of influencers, right?

People have greater levels of access to others who they aspire to be. Like,

whether it's celebrities, whether it's business leaders, whether it's

politicians or whomever and so when people do good, they're able to

showcase that to the masses and I think most of us want to align

ourselves in that same way too, to feel good about why we're doing what

we're doing and to align ourselves with something that's mission based.

You have to be cognizant of the fact that millennials now will represent

some of C-suite executives if not today in the near term, they're

increasingly influential within their investor base. They can be the next

wave of board leaders and on and on and on. You kind of get the point

that as those individuals take greater levels of responsibility within the

business community, I only see this trend increasing.

SURRAN: The Sustainability Accounting Standards Board (SASB) is an

independent standards board that is accountable for due process,

outcomes and ratification of the SASB standards.

It enables businesses around the world to identify, manage and

communicate financially material sustainability information to their

investors. SASB has developed a complete set of 77 industry standards

that are available to download on their website.

SASB also provides guidance and has identified issues considered

financially material, but in the end, it is a company's decision to decide

what is financially material to be disclosed.

On a global level, the Global Reporting Initiative (GRI) helps businesses

and governments worldwide understand and communicate their impact

on critical sustainability issues such as climate change, human rights,

governance and social well- being. Its mission is to empower decisions

that create social, environmental and economic benefits for everyone.

The GRI standards represent global best practices that also focus on an

organization's material topics and related impacts.

On July 12, 2020, the Sustainability Accounting Standards Board (SASB)

announced a collaboration with the Global Reporting Initiative (GRI).

This collaboration was prompted by an increased demand for clarity in

ESG reporting and will also help investors and consumers better

understand the similarities as well as differences between the two sets of

standards.

According to Tim Mohin, Chief Executive of CRI,

"GRI and SASB share the guiding principle that transparency is the best

currency for creating trust among organizations and their stakeholders.

Investors, policy makers, civil society and other stakeholders are

CPAR/OCT. ‘20

4–23

video transcript video transcript

demanding improved disclosure or information on sustainability impacts,

including those likely to drive risk and opportunity in both the short and

long term."

It is important to also mention the Task Force on Climate-related Financial

Disclosures (TCFD) that was established in December, 2015, by the

Financial Stability Board (FSB) in an effort to develop voluntary,

consistent climate related financial disclosures for use by companies in

providing information to lenders, insurers, investors and other

stakeholders.

The TCFD's framework asks organizations to report on four categories

related to climate change: governance, strategy, risk management and

metrics and targets. It also recommends that companies develop a climate

scenario analysis testing the resilience of their strategies.

FOSTER: ESG is growing in popularity but there has been no consensus from

stakeholders on how to report. At the same time, there are opportunities

for asset managers to improve their public profile at a time when social

integrity is increasingly important.

DECANDIDO: The reporting concept is one that is a big challenge for middle market

leaders today and the reason for that is because there is no universally

accepted framework and so for most of those who are tasked with the

responsibility, they come from financial backgrounds in most cases.

They're accustomed to things like generally accepted accounting

principles or GAAP or they're accustomed to IRS frameworks and so

there's this level of comfort of having a framework which you can

conform to. In this case there is no universally accepted one in the US

there are frameworks that are suggested.

Several years back there was something put out called the Sustainable

Accounting Standards Board or SASB. That got early interest because you

know one of the major financial services leaders, Michael Bloomberg,

who was a presidential candidate. He was one of the early board members

and drivers of that initiative. What's neat about that one is that it's aligned

to industry. If you're a company that doesn't associate with a prevailing

industry categorization, you can conform to these niche industry themes in

ESG.

DECANDIDO: There are 77 codes so that can sometimes feel overwhelming but it is one

option for those who are ESG active. Another one which I prefer is called

Principles of Responsible Investment SDGs or sustainable development

goals and what's neat about that is there is no industry alignment to it so

you can be a company from, you name the industry and there's only 17

codes. 17 is clearly far fewer than 77. It's a little bit more digestible,

consumable, for those who are practicing ESG and some of the prevailing

themes there are water, emissions, environmental impact; it could be

children in poverty and so on and so forth.

When you think about a business, there's these prevailing themes that

would apply to any of those organizations across industries.

That's pretty neat. As of late, there's been some new frameworks on

carbon footprint. You don't have to travel too far to understand that carbon

emissions are probably one of the most thematic of all political topics

right now. You've got a lot of activists, people like Greta Thunberg who

are really driving change in that way and so this is a new framework

which is centered around carbon emissions and all that, required

disclosures in that way.

4–24

video transcript video transcript

What's interesting to see there is PRI, Principles for Responsible

Investment, has now made it mandatory for those who are driving that

framework to also be signatories to their organization and so you see this

convergence in the market of larger frameworks with these niche topics

coming together saying, "Hey, this is of highest priority to the market."

One of the things that we're following very closely is the TCFD and this is

a new framework which is centered around environmental footprint, in

particular carbon emissions. What's neat about it is one of these existing

governing bodies, PRI is now mandating beginning in 2020 that all those

carbon-related environmental disclosures now be coupled with some of

their reporting that's required by their cause.

FOSTER: Anthony DeCandido discusses best practices for ESG reporting

DECANDIDO: The first thing we recommend to clients we work with is to align the ESG

metrics to your missions and values. That's a pretty open-ended point.

Once that's set in stone, we help them develop policies and procedures,

levels of governance and we determine what are those KPIs that are

unique and relevant to that particular business in that particular industry

and then from there, there are a lot of different options. I mean the

reporting can be more mathematical an exercise. I see a lot of rating

agencies that are now active with public businesses showcasing where

those organizations rate in all these themes that we've discussed earlier.

I see a lot of organizations focus on sustainability reporting, which I

personally like because it just feels a little bit more customized and unique

to that particular business.

It takes a lot of different forms but we recommend to groups we work

with is ultimately understanding who's your end stakeholder and that

varies depending upon what type of organization is. Sometimes it's more

obvious if you're a public business, it's your stakeholders and your

investors. If you're a private investment company, which is the area of

expertise that I possess, it could be your investors but it could be more

than that. It could be the talent that you wish to attract. It could be the

vendors that you align yourself with. It could be the marketing

professionals, the professional service organizations, it could be anything

and so that to me is really important to lay out before you commence that

operation.

SURRAN: They say communication is the key to success. Strong ESG values and

behaviors can help companies attract investors but also attract and retain

employees. Giving a sense of purpose has never been more powerful than

now. It is important for the public to know that companies support social,

community and/or philanthropic causes. Even though some will argue that

it is too early to establish ESG criteria, it is best to be proactive.

There is real value for businesses to strategically share their ESG practices

as it identifies them as being "well positioned for the future." And how

should they share? The easiest and lowest cost way is through social

media.

In this day and age, social media has true power, and that power is

influence and it's instantaneous. Companies can also update their website,

communicate their achievements via public relations and advertising, issue

press releases, include their philosophy in their annual reports or itemize

their social responsibility efforts in publicly released social responsibility

reports.

CPAR/OCT. ‘20

4–25

video transcript video transcript

FOSTER: When it comes to social responsibility, there are several vehicles that

companies can use to leverage their achievements and progress. Anthony

elaborates.

DECANDIDO: That also will vary depending on the level of sophistication of the middle

market business that we're working with but some of the most common

are press releases. It could be websites, it could be stakeholder investor

reporting, it could be social media. Social media has a heavy, heavy

impact.

When I think about groups that I'm meeting with, that's probably one of

the first places I start. You know, who are they on LinkedIn? What are

their interests, what type of organizations do they follow? There's just this

mass of different communication methods that we would work with but

understand middle-market, they oftentimes lack the financial resources

and even the people resources to drive those communication strategies so

they don't benefit from working from an 11,000-person firm with a robust

unit that only focuses on press or communication. They have to get a

little bit more creative and you find a lot of these professionals wearing a

number of different hats to try to drive that change.

We now have the ability to monitor climate by drones and if you think

about agriculture, right? How is next year's crop to do predictive

analysis? There's just an abundance of available data that many times the

middle market struggles to one retrieve but then to organize and then

third to analyze and report, and so that to me is probably one of the

biggest shortcomings of being a middle market business today because if

you were a public business, a lot of the information you produce in your

public filers would filter up through and you would be able to work with

a rating agency, like Sustain analytics who's owned by Morningstar to

determine what your standing is and you named the ESG measurement.

It's a little bit different.

Professionals in all different markets right now, trying to solve this

problem that we're talking about. You don't necessarily need to be a

professional services firm like we are to try to solve this problem.

You can be a technology firm, you can be a media business. You

mentioned you were on the phone with this group yesterday. I was on the

phone with a different group and they were trying to solve a very simple

part of the food chain in ESG. It was simply the data being collected.

We're not a technology firm but we want to assist the consultant or public

accounting firm or service provider in presenting these ESG

measurements and I thought, okay, brilliant in the way that they're able to

do this but okay, it's only just a segment of that problem that we're trying

to solve but Hey, look, these groups are making an honest living doing it

and so that just is further proof of how large this ESG market has

become.

FOSTER: Anthony discusses how RSM U.S. adds value for their clients ESG and

steps they take as a firm with respect to ESG.

DECANDIDO: The clients that we work with today, they're most interested in, "Hey, I

have this problem, I can't organize my data. One of the neat things we

have at the firm is we have individuals who are data scientists and data

experts and so they've performed many projects where they've organized

clients' data, created insights through it, more predictions and a more

thoughtful insights and then the second one is really benchmarking. Now

we have this information but how do we measure up against our peers?

4–26

video transcript video transcript

And that's a big, big challenge with private companies in the middle

market and then many times they also lack that infrastructure to do their

own reporting. There are many different entry points for us within that

cycle that we could assist clients with.

When we think about our own business as a professional services

organization, one of the highest priorities for us is our people. How do we

treat them? What's their level of engagement? Are we providing regular

continuing professional education? Is it an organization that's composed of

individuals that look like and behave like our clients and the community

that we operate in?

We're really big on diversity inclusion but especially on the "I", diversity

inclusion, which is the inclusion. It's not a matter of, "Hey, did we bring

those right people in the organization but it's more about, okay, now

they're here but what are we doing to make sure that they feel comfortable

in the organization". Another part you could imagine is a lot of our senior

level individuals that are out in the field serving clients, they're traveling

by a lot of different means most often by plane.

We're very thoughtful also about our carbon footprint and how can we

reduce that? We're an organization that has really embraced technology so

we have all these different mediums for us to engage with one another but

then are we really holding ourselves accountable to drive that change?

For instance, if you and I have a meeting that we can do remotely by web

conference, are we actually doing that? Are we instead flying out to New

York City to meet with you to host that meeting? Right? There're all these

very simple examples of how we evaluate our business and then I think the

other most obvious, which is easy for the generation I grew up in is, yeah,

what are we doing for just compost and recycling and that sort of thing.

My parents' age are people who you ask them, they would say, "Yeah, it's

important."

But do they behave like it's important, maybe, maybe not and so that's sort

of the rift for us organizationally is a lot of it comes with education and

awareness and even training to ensure that people are putting their money

where their mouth is. And oh, by the way, it should be able to prove for

our organization that there is a return on investment. We're doing a light

spend to put all these things together but we do expect in return that there's

going to be some financial benefit to all this. It should really satisfy two

objectives: doing something good and also financial.

SURRAN: RSM U.S. LLP and the U.S. Chamber of Commerce recently announced

results from its RSM U.S. Middle Market Business Index (MMBI)

Environmental, Social and Governance (ESG) special report.

It is a first-of-its-kind middle market economic index developed by RSM

in collaboration with Moody's Analytics. RSM asked middle market

executives 20 questions relating to changes in various measures of their

business, the economy and outlook, including but not limited to:

lPressure businesses feel to pay more attention to the way they operate,

especially when it comes to their practices regarding environmental,

social and governance issues, or ESG.

lRedefining the purpose of a corporation from simply making profits for

shareholders to benefiting multiple stakeholders – customers,

employees, suppliers, communities and shareholders

Some of the survey findings include:

CPAR/OCT. ‘20

4–27

video transcript video transcript

lExecutives of middle market companies reported that they now have

written objectives and performance metrics for stakeholders

lLarger middle market companies with $50 million to $1 billion in

annual revenue were more likely to have written objectives and

performance metrics than smaller middle market companies, with $10

million to $50 million in annual revenue.

lJust 39% of executives are familiar with ESG criteria to evaluate the

performance of organizations, which was the same percentage as in

RSM's 2018 survey.

According to Anthony DeCandido,

"there's a notable rift between large companies and their smaller middle

market counterparts. Smaller companies don't yet feel the pressure to

follow the broader push for corporate social responsibility, while larger

businesses are more likely to be held accountable by stakeholders and

typically have better resources in place to conduct a deeper level of

analysis. We'll continue to see this trend evolve as the demand for

transparency increases and companies face greater regulatory pressure

both in the U.S. and globally."

FOSTER: Anthony DeCandido gives us his views as to what executives need to

know and what they need to avoid.

DECANDIDO: Sure. If you're a middle market business leader today watching this, I

would say that if you are thinking about ESG one, you're like your peers.

If you're confused as to how you should begin you're also like your peers,

if you have aspirations of having something robust that you can feel proud

of, there's people that are available to assist you but when you start that

journey, the first thing you want to determine is do I want to buy or build

it? Buy meaning you can align yourself with a number of the reputable

consultants in the market today that can help you with that lift but you also

need to evaluate what's the level of expertise of my team. Do they one,

have the time resource available? And two, do they have the level of

sophistication to handle this? And that's a decision that's going to be very

personal and unique to accompany but there's a lot of different ways to

handle it.

What do they need to avoid? I think there's this term in industry called

greenwashing, which is essentially saying you're doing something

prosocial but it's really not. Understand also that there are some bad actors

in space so, if you're an asset management business at the early stage of

your life cycle and you're trying to generate more capital inflows and you

want to drive interest in your business, it's a way to market yourself better.

Understand that there's people that are saying they're doing things because

there's a benefit to them but maybe they are, maybe they're not and I think

you want to avoid doing things that could actually in fact have a long-term

negative effect on you by saying you're doing something that you're not.

That to me would be a big problem.

FOSTER: Asset managers have a plethora of data that can be used to accumulate

useful information. But is all data good data and can it be incorporated

into an ESG strategy?

DECANDIDO: If you're a public investment company, it's a bit easier because some of the

technologies exist that allow those companies to sift some of the financial

and even non-financial information up through the filings to that

organization.

4–28

video transcript video transcript

The challenge becomes when you're a private asset management business,

there's a lack of good data. One of the things we do offer is we have this

new social and environmental impact methodology tool that we use to

assist those organizations with pulling that information together so they

could then measure. That is probably one of the most pervasive challenges

of middle market companies today is accumulating their data, they just

don't know where to start and so many times you have this scenario where

you have decentralized business units that are on different systems and

have different data policies and practices and so sometimes that

convergence exercise is really challenging.

Many times, these large middle market businesses we work with, a lot of

times they just want to start from scratch. They kind of throw out some of

the old and start from new and so they have a little bit more of an

enterprise look as to how they do things that way.

FOSTER: Anthony DeCandido discusses ways to avoid managers picking and

choosing metrics that will manipulate data results and how to handle

outliers.

DECANDIDO: The results are probably one of the biggest issues because how do you feel

if you produce results that you're not proud of? To me there's a few

different ways of looking at, one is to say, okay, we're on this journey.

Like we understand that today we're not perfect and so this piece of data

suggests to us that we have an opportunity to improve a business practice.

Maybe you know, the following year and the following year after that you

can show the improvement of that issue. That's one thing that is

showcasing the journey.

The other thing is just basic remediation. I think if an organization is really

thoughtful of their ESG practices, they're going to want to know where

they're failing and they're going to want to have an appropriate response

that they can communicate to the market. It doesn't have to be depicted as

a terrible thing. It could be depicted as something that allows for business

improvement.

An outlier is an opportunity to learn something unique and different about

a particular company. I mean, our data scientists would look at the

standard deviations of some of the data points from one another and so

that would all be thematic in the way in which we provide our insights but

yeah, I think outliers, we'd want to really investigate them to understand

what's the spirit of that transaction, what occurred, who was associated

with it and so on and so forth because it could hold some merits.

FOSTER: There are several organizations out there providing ESG reporting

templates. Anthony discusses the impact they are having on

standardization or validation of measurements.

DECANDIDO: There's two impacts. One, I think is it's improving the level of education

and awareness of organizations who have ESG as a priority.

That's all positive. There's this idea that, "Hey, what I can't measure, I can't

evaluate, right?" Someone we work with, he uses this great term. He says,

"In God we trust but everyone else, bring data." That's a really interesting

thought because it's true. I mean, how many times in the market today, you

hear people talk about anecdotal evidence and we believe we're doing this,

well, what's the proof of it? I think there are merits in that.

CPAR/OCT. ‘20

4–29

video transcript video transcript

The challenge with it is it's also creating a lot of confusion. If you're a

business in a respected industry without that framework which you can

follow, it's really up to you to customize it and so for some that may be

daunting and so that's where we're able to really assist these clients is

trying to narrow that focus and provide some more reporting frameworks.

FOSTER: Is there a tangible link between ESG and value creation? And, if so, how

can it be measured? Anthony gives us his views.

DECANDIDO: That's the million-dollar question. There have been a lot of academic

thinkers who have put together projects and are in support of the fact that

yes it does lead to improved business results.

There are others that suggest the opposite. We see a lot of survey results

from all the professional service organizations. A lot of the technology

companies, some of the ESG fund, survey data is pretty limited in

empirical data. For example, if you surveyed 400 people and you phrase

questions a certain way, well then it may lead to a particular response.

The truth is there's really no empirical data to support that ESG behaviors

do in fact drive better financial returns. I think we all want to believe they

do but they don't always and so I think a lot of it is following the theme of

that particular fund because above and beyond financial returns is

nonfinancial.

For example, we can say we did all these things, we invested all this

money and oh, by the way, our employees and customers are more

engaged or oh, we did all these things and we spent all this money and by

the way, we believe our business is set for the future and we're more

sustainable. Instead of being in business for the next 5 years, we're going

to be in business for the next 50 years. There are all these different

nonfinancial ways to justify the cost. It goes back to the previous

conversations you and I have had, which is what are the missions and

values of that organization? And so long as there's alignment between what

we're doing and what the outcome is, then I think all of this makes perfect

sense.

FOSTER: In the beginning of the segment, we defined ESG as Environmental, Social

and Governance. But does one criterion carry more weight that the other

and if so why?

DECANDIDO: Yeah. I think they're all important but I do think the environmental topics

are much more relevant today than some of the others. Social ESG impacts

have been well documented. There's a lot of publicity on them, whether it's

nightly news, some of the publications we all read social media.

I don't think there is the same level of educational awareness in the

environment yet and I referenced some basic examples earlier. There are

some very intelligent, educated people who still don't understand how their

behaviors drive poor environmental issues and so a lot of the companies

we've worked with, we just met with a group that is a shipping business

for natural gas. That's an organization that's so rooted in their environment

but they're actually quite unique relative to most of the other companies

that we work with.

Carbon emissions, water safety, occupational safety, all those kinds of

things are really, really important to the environments that we operate in. I

would say that it's the E in ESG.

FOSTER: Anthony DeCandido ends our segment by leaving us with his final

thoughts.

4–30

video transcript video transcript

DECANDIDO: I would say that many people are thinking about ESG today. Most people

don't quite have a well-articulated vision or strategy around ESG and that's

the primary reason why there's a lot of chatter about it. There's a lot of

interest in it because people are saying it's of a high priority but they're not

actually organized to address what they're saying is a priority. I do expect

in the coming months and even years there's going to be a lot more

organization around this business topic.

I think we will see a solution on the framework issue that we spoke about

earlier with having some universally accepted framework. You may even

see some regulatory releases of how companies should organize or report

but I also think the evolution of this is going to be centered around data

and the ability to benchmark because to me and the groups that we've met

with, if you're not able to benchmark the impact that you're having, then

why bother in the first place? Those to me, would be some of the

developments I would expect to see in the next few years.

CPAR/OCT. ‘20

A–1A–1

evaluation form evaluation form

Evaluation Form

Please rate the segments on the October 2020 issue

5 = Excellent, 4 = Very Good, 3 = Good, 2 = Fair, 1 = Poor

Please comment on each segment you used. (Attach additional pages if needed.)

I. Segment

Overall Speakers Format Content Topic

1. COVID-19: Are Your Financial

Statements Infected? – Part I _____ _____ _____ _____ _____

2. COVID-19: Are Your Financial

Statements Infected? – Part II _____ _____ _____ _____ _____

3. Deferral of Payroll Tax

Obligations and More _____ _____ _____ _____ _____

4. Data Validation & Reporting

Excellence – The Future of

Corporate Responsibility _____ _____ _____ _____ _____

Segment 1:__________________________________________________________________

Segment 2:__________________________________________________________________

Segment 3:__________________________________________________________________

Segment 4:__________________________________________________________________

Suggested Topics to be covered in future volumes (please comment):

_______________________________________________________________________________

A–2

evaluation form evaluation form

Please rate the discussion leaders

5 = Excellent, 4 = Very Good, 3 = Good, 2 = Fair, 1 = Poor

II. Discussion Leader

Were learning objectives met? o Yes o No

Were prerequisite requirements appropriate?: o Yes o No

Were course materials valuable? o Yes o No

Was course content up-to-date? o Yes o No

Were completion times appropriate? o Yes o No

Were the facilities satisfactory? o Yes o No

III.Summary

Send to:

RFR

Kaplan Professional Education

332 Front Street, Suite 501

La Crosse, WI 54061

Name (please print):

Title:

Firm:

City/State:

Date:

Knowledge Discussion Leader/

of Subject Teaching Skills

Segment 1: ___________________ ___________________ ___________________

Discussion Leader’s name

Segment 2: ___________________ ___________________ ___________________

Discussion Leader’s name

Segment 3: ___________________ ___________________ ___________________

Discussion Leader’s name

Segment 4: ___________________ ___________________ ___________________

Discussion Leader’s name

CPAR/OCT. ‘20

B–1

index index index index index

A. By Citation

Accounting Standards Update – see: ASU

ASU No. 2014-09 June – 2

ASU No. 2016-02 June – 2

ASU No. 2017-02 October – 1

ASU 2018-08 July – 2

Digital Realty Trust v. Somers November – 4

FASB or Financial Accounting Standards Board – see: ASU

IRS IR-2019-182 January – 1

IRS Notice 2018-70 November – 1

IRS Notice 2020-29 July – 4

IRS Notice 2020-50 August – 3

IRS Notice 2020-51 August – 3

IRS PLR 201901003 April – 1

IRS Rev. Proc 2019-38(1) November – 3

IRS Rev. Proc 2019-43 January – 1

IRS Rev. Proc. 2020-20 June – 3

IRS Rev. Proc. 2020-23 October – 4

IRS TD 9875 November – 3

Ivison v. IRS June – 4

Norman v. United States February – 3

Public Law 86-272 December – 1

Public Law 115-123 November – 3

Public Law 115-97 November – 3

Simmons v. United States June – 4

South Dakota v. Wayfair December – 1

SSARS No. 21 January – 2

SSARS No. 24 January – 3

Statement on Standards for Accounting & Review Services – see: SSARS

Tax Cuts and Jobs Act, impact on individuals of December – 3

Tibble v. Edison August – 4

B. By Topic

AICPA Peer Review Program April – 1

Annuity types and requirements February – 3

Apportionment, state revenues and November – 1

Apportionment of income, considerations for November – 1

Index

Note: At the request of several subscribers, this Index reflects the most recent 11 months of

CPAR programming rather than the current calendar year.

November 2019 – October 2020

B–2

index index index index index

ASC Topic 606, implementation of Jan. – 4; July – 2

ASC Topic 606, PPP loans and July – 2

ASC Topic 718 August – 1

ASC Topic 842, implementation of Dec. – 2; Jan. – 4; July – 2

ASC Topic 842, pandemic and October – 1

Auditing standards, complexity of April – 1

Auditing standards, scalability of April – 1

Auditor's report, revised May – 4

Audit quality, PCAOB and February – 2

Automobile depreciation September – 3

Blockchain, accounting and February – 4

Blockchain, types of February – 4

Bonus depreciation, IRS special rule on May – 3

Bankruptcy, COVID-19 and September – 1

Businesses, effect of COVID-19 on September – 2

Business Interest Expense Limitation, IRC Sec. 163(j) May – 3

CAM, PCAOB guidance on Nov. – 4; Dec. – 2; Feb – 2

CAMs, auditor independence and

CAMs, inventory observation challenges October – 2

CARES Act May 1; May – 2; June – 3; June – 4

CARES Act and NOLs June – 4

CARES Act, charitable contribution deductions and July – 4

CECL model for loan losses December – 2

Chapter 11 September – 1

Chief Accountant, SEC Office of January – 4

Committee on Corporate Reporting December – 2

Compilation engagement, preparation vs. January -3

Conservation easements, tax benefits and dangers of January – 1

COVID-19, challenges companies face due to May – 2; Aug. – 1; Sept. – 2

COVID-19, economy and August – 1

COVID-19, FATCA and June – 3

COVID-19, IAASB Audit Implications of July 1

Critical audit matters – see: CAM

Cryptocurrency, guidance for December – 3

Current expected credit loss model – see: CECL

Debt Instruments, significant modifications of October – 4

Depreciation, IRS Sec. 704(c) and May – 3

Digital assets, AICPA and February – 4

Dirty Dozen Tax Scams and COVID-19 September – 3

Disaster relief, tax law provisions and Nov. – 3; Feb. – 1

Disclosure effectiveness, improving April – 4

Distributions & loans, CARES Act August – 3

Dodd-Frank Act, transparency and October – 4

Dodd-Frank Act, whistleblower complaints and September – 4

Earnings management, reasons to perform September – 4

B–2

CPAR/OCT. ‘20

B–3

Economy, COVID-19 and May – 1

Elder Care, CPAs role in July – 3

Elderly, financial abuse of July – 3

Electronic Code, IESBA and June – 1

Electronic payments, risks involved with December – 4

Employee and employer donations, special August – 3

Employee vs. independent contractor, classification of December – 3

Ensuring Integrity, 14th Annual Audit Conference on April – 1

Enterprise blockchain, accounting challenges for February – 4

Entertainment and meal expense deductibility April – 2

Environmental, social and governance (ESG) issues October – 4

Estate planning, importance of April – 3; July – 3

Estate tax, proposed changes to April – 3

Ethical culture, components of November – 2

Ethical culture, maintaining November – 2

Ethics, tax planning and August – 2

Executive compensation, COVID-19 and Aug. – 1; Oct. – 2

Family Limited Partnerships April – 3

Federally Authorized Tax Practitioner (FATP) April – 2

Families First Coronavirus Response Act (FFCRA) May – 1; June – 4

Fiduciary litigation, key issues August – 4

Financial Accounting Standards Board (FASB) June – 2

Financial statements, COVID-19 and August – 1

Financial statements, intent and use of January – 3

Foreign Account Tax Compliance Act (FATCA) June – 3

Forms W-8 and W-9, information reporting and June – 3

Fraud triangle October – 2

Funding programs, CARES Act May – 1

Globalization, impact on businesses of April – 4

Going concern analysis October – 2

Goodwill impairment, COVID-19 and October – 1

Goodwill impairment tests December – 2

Hardship extension, FATCA and June – 3

Health care plans, guidance on July – 4

H.R. 1158, Consolidated Appropriations Act, 2020 February – 1

H.R. 1865, Further Consolidated Appropriations Act, 2020 February – 1

H.R. 6408, SOS America Act July – 4

IESBA Technology Project August – 2

Income tax returns, extension for 2019 May – 1

Internal controls, risk assessment and April – 1

International Accounting Standards Board June – 2

International Code of Ethics for Professional Accountants June – 1

International Ethics Standards Board for Accountants June – 1; Aug. – 2

International Auditing and Assurance Standards Board May – 4; July – 1

index index index index index

B–4

International Ethics Standards Board for Accountants – see: IESBA

International standards, benefits of July – 1

IRS Form 941X, existing and revised October – 3

KAMs, CAMS vs. May – 4

Lease accounting, implementation of new standard on January – 4

Lease-based donation , special tax breaks for August – 3

Life expectancy, regulations for tables of January – 1

Materiality, auditor's judgment on May – 4

Medicaid Waiver Program June – 4

National Adult Protective Services Association (NAPSA) July – 3

Nexus, physical presence and economic Nov. – 1; Dec. – 1

No Action Letter, SEC and September – 4

Non-Compliance with Laws and Regulations (NOCLAR) June – 1

Non-GAAP measures, regulation of Nov. – 4; Jan. – 4

Opportunity zones, tax benefits of qualified April – 2

OSHA, whistleblower complaints and September – 4

Pandemic, Standard Setters’ Response to July – 2

Payment fraud, protecting against December – 4

Payroll tax deferral October – 3

PCAOB, five-year strategic plan of February – 2

PPPFA, New criteria to qualify for forgiveness under July – 2; July – 4

Preparer tax identification number (PTIN) June – 4

Public interest entity (PIE) June – 1

QOZ – see: Qualified opportunity zones

Qualified default investment alternative (QDIA) January – 2

Qualified opportunity zones, tax benefits of April – 2; Aug. – 3

Retaliation, ethical culture and November – 2

Retirement plans, benefits of January – 2

Retirement plans, distribution from November – 3

Revenue recognition standard, implementation of January – 4

Rev. Rul 2020-05, changes under April – 2

Safe harbor approach, the May – 3

Safe harbor, rental real estate and November – 3

SBA Funding Programs May – 1

SBA PPP loans July – 2; Sept. – 1

Schedules K-2 & K-3 September – 3

SEC, PCAOB and January – 4

SEC, disclosure of cybersecurity risks by November – 4

SEC, rules on auditor independence November- 4

SECURE Act August – 3

Seventy percent test January – 2

Simplification Initiative June – 2

Small Business Reorganization Act of 2019 Sept. – 1

South Dakota v. Wayfair December – 1

SOX, whistleblower complaints and September – 4

index index index index index

B–4

B–4B–4B–4B–4B–4

CPAR/OCT. ‘20

B–5

Spousal Lifetime Access Trust (SLAT) April – 3

SECURE Act of 2019, changes to January – 1

SECURE Act of 2019, key provisions of February – 1

Smart contracts, fraud risk considerations and February – 4

Social security taxes and benefits, changes in December – 3

Speak-up and listen-up cultures November – 2

State and local taxes, limit on deductibility of September – 1

Sustainability Accounting Standards Board (SASB) October – 4

Task Force on Climate-related Financial Disclosures (TCFD) October – 2

Tax Cuts and Jobs Act – see: TCJA

TCJA, changes in employee deductions February – 3

TCJA, IRC Section 118 and October – 4

Throwback and throwout rules, implications of December – 1

Transit card reimbursement, IRS views on May – 3

Valuation analysis, COVID-19 and September – 2

Whistleblower complaints September – 4

Withholding calculations, change to February – 3

Working remotely May – 2

index index index index index

CPAR/OCT. ‘20

C–1

Group Attendance and CPE Record

group attendance and cpe record

Company __________________________________________________ Date __________________

Segment Title _______________________________________________________________________

Location of Seminar _______________________________________________________________

SS# Name State Hours

Earned

________________ ________________________________ ____________________ ____________

I hereby certify that the above individuals viewed this portion of CPA Report,

participated in the group discussion, and earned the recommended hours of CPE credit.

Discussion leader _______________________________ Date completed ____________

All CPE hours listed are recommended. They are developed in a manner consistent with

AICPA guidelines. Since CPE requirements vary by state and/or professional organization,

we suggest you contact the appropriate organization for information about their requirements.

0 views·141 pages

CPA REPORT SUBSCRIBER GUIDE PDF Free Download

CPA REPORT SUBSCRIBER GUIDE PDF free Download. Think more deeply and widely.

Uploaded by dr_jacqueline on 4/10/2026

/141

100%