How to Keep the Lid on your Finances when a Food Recall Strikes

By Clark Schweers & Rick Schreiber

Some of the biggest names in the grocery aisle have made headlines this year with high-profile recalls, including General Mills and Kellogg, among numerous other household staples. Major food manufacturers, including ConAgra, have also pulled their products from market with nationwide recalls. In fact, this year, the U.S. Department of Agriculture (USDA) has recorded 51 food safety and inspection recalls and alerts through Aug. 30, up a whopping 121.7 percent from the same period in 2015, when it recorded just 23. In 2014, the USDA recorded 39 recalls and alerts over the same time period, a figure approximately 30 percent lower than this year.

Manufacturers have noticed. According to the 2016 BDO Manufacturing RiskFactor Report, 100 percent of the largest publicly traded U.S. food manufacturers cite product quality, contamination issues or recalls as a significant business risk in their regulatory filings, up from 90 percent in 2015.

And it’s clear the stakes are high not just for manufacturers, but for suppliers, retailers and grocers up and down the entire supply chain. It’s important to understand why recalls are growing more common and to implement protective measures to mitigate risk before your supply chain sours.

What’s turning up the heat?

Often, upticks in regulatory action can simply be due to a more watchful eye from regulatory bodies. In 2015, President Obama signed into law the Food Safety Modernization Act (FSMA), arguably the most sweeping reform of food safety in more than 70 years. The FSMA provides the FDA with new legislative authority to establish preventive control standards and enforce compliance, as well as tools to better respond to problems when they do occur.

But while increased regulatory scrutiny is likely a contributor to the increase in product recalls and contamination issues, it’s not entirely to blame. Shifting consumer preferences are prompting dramatic changes in the industry as some food manufacturers remove pesticides, preservatives and other additives from their products to take advantage of the organic craze. While the popularity of organic food is driven by a trend toward greater consciousness of health and wellness, synthetic substances serve an important role in safeguarding against spoilage and foodborne illness. More recently, food manufacturers have also begun removing preservatives and artificial ingredients from non-organic food, in response to demand for “natural” foods. The long-term health benefits of organic or natural foods remain unclear, but there’s no question that the preservatives they exclude prevent bacterial growth during transport and distribution.

Technology has also changed the way we detect and report on foodborne illness. Individual incidents that historically would have been dismissed as one-off episodes and gone unreported can now be tracked and connected by Genome and DNA testing. This allows regulators to better pinpoint the source of foodborne illness outbreaks, which could be contributing to the number of product recalls. Social media and consumer-run websites have also become popular forums for bringing an outbreak to attention.

Gloves on: What protective measures can help?

Food processed at a single plant can be routed far and wide through the market — for example, a large processor’s fruit may be sold in frozen bulk, smoothie mixes and other products under various manufacturers’ brand names nationwide. This makes the process of a product recall potentially extensive and costly. And the consequences can persist long after the financial bleeding stops — reputation can also take a serious bruising.

To shield themselves from the consequences of a contamination incident or recall, food manufacturers should consider these protective measures:

  1. Implement strong supply chain management procedures.
    An ounce of prevention is worth a pound of cure. Thoroughly understanding where risk lies along the supply chain and implementing strong quality controls can help to mitigate and detect food contamination before an outbreak occurs. To proactively manage the risk of a food recall incident, food manufacturers should implement policies and procedures to ensure their suppliers’
    and their own compliance with Current Good Manufacturing Practice regulations and the latest food safety standards, including food allergen controls and routine food safety audits by third-party certification bodies.
  2. Review contracts.
    Heavyweights in the retail industry are increasingly including indemnifications against damages in the event of a product recall or critical incident in their contracts with suppliers and manufacturers. Food manufacturers should thoroughly evaluate their agreements with distributors and retailers to identify where responsibility lies in the event of a recall, and avoid risky business where possible.
  3. Expect the worst.
    Every food facility should have an up-to-date crisis management plan that establishes roles and responsibilities and outlines a strategy for every possible scenario.
  4. Invest in insurance protection.
    Product contamination policies have gained popularity in recent years — not only because of the increased spotlight on food safety, but because investors expect it. Fortunately, as more companies incorporate liability, property and product recall policies within their coverage, more carriers have entered the market and the growing demand has pushed premiums down.

Boiling over: How to limit the damage?

No manufacturer is entirely safe from the risk of a recall or contamination incident. It’s important to have a contingency plan in place to help identify the source of the contamination and isolate the problem to prevent further spread in plants and factories. Manufacturers should also have a response plan prepared to curb potential financial and reputational fallout. Consumers and investors alike are much more forgiving when companies react and respond quickly.

In the event of a contamination incident, it’s also important to factor in potential losses to financial forecasts to staunch the bleeding and avoid future surprises. With recalls on the rise, companies should take a close eye to their insurance policies and contracts with supply chain partners to pinpoint risk, and ensure the right protective measures are in place to keep the supply chain in check and limit damage in the event of a recall.

This article originally appeared in BDO USA, LLP’s “Manufacturing Output” newsletter (Fall 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com

Big Data: How Big An Impact for REITs?

By Stuart Eisenberg

Big Data is big-time ubiquitous in headlines across industries, but the real estate industry has been slow to take advantage. That’s all changing. Commercial real estate companies and REITs are embracing new technologies to harness the power of Big Data to elevate their investment and management strategies and optimize their operations.

When we talk about Big Data, we mean the exponential growth in volume, variety and velocity of structured and unstructured data. That data, however, is only as useful as our ability to interpret it—an ongoing challenge for every organization. But in recent years, advanced analytics and powerful business intelligence technologies have enabled us to extract real value from Big Data. And it’s about time, because Big Data is only getting bigger. Embedded sensor technology and wireless connectivity have opened up a whole new world of information—the so-called “Internet of Things.” In real estate, as in most industries, knowledge is power; those who not only have the information but know how to use it are empowered to make smarter decisions, faster.

Of course, all investment decisions ultimately hinge on investors’ future predictions. But there are several significant ways real estate developers and owners, REITs included, can gain an edge by turning Big Data into actionable insights.

On the investment front, property owners have access to unprecedented information and intelligence around demographics, supply and demand trends and economic nuances—and better algorithms to analyze that intelligence. At a time when REITs are wise to exercise restraint in their investment decisions and deploy capital sensibly, this could be a valuable tool to help them better understand and target certain markets. At the property level, many variables impact an asset’s value, and with the rise of Big Data, REITs are able to analyze demand for specific features within a property, including amenities, as well as LEED status and energy efficiency. This intelligence can help enhance value by better aligning with tenants’ demands.

From a management perspective, greater access to demographic and real-time local trend data can help landlords, including REITs, make decisions at the individual property level. When setting rents, for example, REITs might analyze traditional population data along with new, non-traditional data sources to determine if a certain property is a candidate for a rent increase, or if they’ll need to invest in upgrades or other perks to attract and keep tenants. Similarly, activity trackers and smart watches and phones mean more data is available than ever before at the individual level. If data indicates people in a certain population center are walking or biking more instead of driving, REITs might forecast increased demand for properties in their portfolios that are near walkable retail centers, entertainment and other amenities.

From an operational perspective, the application of the Internet of Things within properties themselves allows owners to capture and analyze data from physical objects. Many owners are upgrading their buildings and automating certain decision-making processes to build efficiencies. For example, many have installed smart sensors and devices that can track temperature, air quality and other metrics that proactively alert owners to maintenance or repair needs within their properties. Many are also automating back-office processes. As more new technologies come into the market, REITs and other property owners will be better able to monitor properties, trim costs and make their overall operations processes smarter.

It’s clear that Big Data affords real estate owners and REITs a big dose of opportunity to better predict, monitor and measure their investments, and could ultimately unlock more value for shareholders.

This article originally appeared in BDO USA, LLP’s “Construction Monitor Newsletter (Winter 2017). Copyright © 2017 BDO USA, LLP. All rights reserved. www.bdo.com

New Deferred Compensation Regulations: What Nonprofits Need to Know

By Joan Vines, CPA

The Internal Revenue Service (IRS) released proposed regulations that provide guidance for the nonqualified deferred compensation arrangements of tax-exempt organizations in June. The regulations, which have been anticipated by the industry since 2007, address the interplay between Internal Revenue Code Section 457 and Section 409A, which govern the nonqualified deferred compensation arrangements of all employers, including tax-exempt organizations. The newly proposed Section 457 regulations provide plan design opportunities specifically for tax-exempt employers, which could aid in the recruitment and retention of key executives.

The proposed regulations provide comprehensive guidance for nonprofit employers and offer several options for employers structuring deferred compensation plans. Section 457(f) requires the immediate taxation of nonqualified deferred compensation upon vesting. Its newly proposed regulations contain plan design features that effectively delay the vesting event, thereby avoiding immediate taxation and providing much-needed clarity to when compensation is subject to or exempt from Section 457(f).

The proposed regulations become effective upon finalization, but may be relied upon in the meantime.

The new regulations distinguish between for-profit and nonprofit deferred compensation requirements with changes specific to six aspects—risk of forfeiture, salary deferrals, noncompete agreements, short-term deferrals, severance pay and other welfare plans.

ROLLING RISK OF FORFEITURE
The proposed regulations permit an upcoming vesting date, as well as the point of taxation, to be extended, provided:

• The extension is made at least 90 days before the vesting date;

• The extended vesting is conditioned upon the employee’s provision of substantial services for at least two years (absent an intervening event such as death, disability or involuntary severance from employment); and

• The present value of the amount to be paid at vesting must be more than 125 percent of the amount the employee otherwise would have received in absence of the extended vesting date.

BDO Insight: Section 409A similarly disregards an extended risk of forfeiture, unless the present value of the deferral is materially greater than the amount otherwise payable absent such extension. However, Section 409A does not provide a bright line test to determine “materially greater” and does not require a two-year, service-based minimum extension. The Section 457 proposed regulations are more rigid with respect to tax-exempt employers. Where an employer is exempt from U.S. taxation, the employee derives a tax benefit from the deferral while the employer is indifferent. The additional payout required under the Section 457 proposed regulations is designed to constrain tax-motivated deferrals by employees. A tax-exempt employer may not be as willing to agree to the additional vesting period if the payout is significantly higher. For instance, an employer might prefer to pay $100,000 in 2018, rather than potentially more than $125,000 in 2020.

SALARY DEFERRALS
Under prior guidance, current compensation, including salary, commissions and certain bonuses, was considered vested and therefore ineligible for deferral under Section 457(f). However, the proposed regulations permit current compensation to be deferred under Section 457(f), provided the following rules are met:
• The deferral election must be made in writing before the beginning of the calendar year in which any services that give rise to the compensation are performed (or within 30 days after a new employee’s hire date for pay attributable to services rendered after the deferral election);

• Payment of the deferred amounts must be conditioned upon the employee’s substantial services for at least two years (absent an applicable intervening event); and

• The present value of the amount to be paid at vesting must be more than 125 percent of the amount the employee otherwise would have received in absence of the deferral.

BDO Insight: The two-year minimum deferral period applies separately to each payroll deferral. Additionally, an employer match of more than 25 percent may be required to satisfy the 125 percent rule for salary deferrals.

NONCOMPETE AGREEMENTS
Under prior guidance, the vesting schedule for deferred compensation served as a retention mechanism, requiring the employee’s continuous services through the vesting date as a condition to receive the amount. Under the newly proposed regulations, vesting may also serve as an enforcement mechanism for a noncompete covenant, requiring an employee to refrain from providing services to a competitor for a specified period. Provided the noncompete is a written, bona fide and enforceable covenant, the vesting period may be extended through the end of the restrictive period, allowing tax-exempt employers to make post-employment payments during such period. In addition, deferred compensation payable upon a voluntary termination is no longer treated as fully vested at all times if the amounts could be forfeited in accordance with the terms of a bona fide noncompete covenant.

BDO Insight: Among other factors applied to determine a bona fide noncompete covenant, the facts and circumstances must show that the employer has a substantial interest in preventing the employee from performing the prohibited services. To the extent the compensation paid to the employee for entering into a noncompete agreement exceeds the value of such agreement, (measured, for example, by the economic damages the organization would incur from an employee’s violation of that covenant), then the restrictive covenant may not be a bona fide noncompete agreement for purposes of Section 457. A valuation of the noncompete agreement may be in order to support an extension of the vesting date to the end of the restrictive period.

SHORT-TERM DEFERRALS
The proposed regulations provide that Section 457(f) does not apply to an arrangement in which payment is made within the “2 ½ month short-term deferral period” under Section 409A, which is generally March 15 of the first calendar year following the year of vesting.
BDO Insight: The Section 457 proposed regulations apply the Section 409A definition of short-term deferral, but substitute its own definition for “substantial risk of forfeiture.” Accordingly, a short-term deferral under Section 457 may not constitute a short-term deferral under Section 409A as is the case of a plan with a noncompete vesting provision. Technically, income taxes are due upon vesting under Section 457(f). However, the proposed regulations make clear that short-term deferrals are not subject to Section 457(f), thereby allowing income taxes to be collected upon distribution, which is administratively convenient where there is a gap between the vesting and distribution dates.

SEVERANCE PAY
The proposed regulations provide that Section 457(f) does not apply to severance pay in connection with an involuntary separation from service (including a voluntary termination by the employee for a pre-established, good reason condition that has not been remedied by the employer) or pursuant to a window program or an early retirement incentive plan. Payments under such “bona fide severance pay plans” must not exceed two times the employee’s annualized compensation for the preceding calendar year (or the current calendar year if the employee had no compensation from the employer in the preceding year) and payment must be made by the last day of the second calendar year following the calendar year in which the severance occurs.

BDO Insight: Pay due to an involuntary separation from service or participation in a window program is similarly exempt from Section 409A in limited amounts (the lesser of two times the employee’s annual rate of pay for the preceding year or two times the compensation limit set forth under Section 401(a) (17) for the year of separation).

OTHER WELFARE PLANS
The proposed regulations clarify that Section 457(f) does not apply to bona fide death benefit, disability pay, sick leave and vacation leave plans.

BDO Insight: Section 409A similarly exempts such welfare plans from its deferred compensation rules.

WHAT SHOULD I DO NOW?
Prior to the finalization of these regulations, tax-exempt organizations can take immediate action to align current deferred compensation procedures with the recent changes. Nonprofits, foundations and universities should review their current arrangements, severance plans and welfare benefit plans in light of these proposed regulations, and develop a plan to implement the necessary updates. Additionally, nonprofit executives should be proactive and take steps to effectively communicate with their employees in regards to the changes.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com

Did you know…

According to the 2016 BDO Manufacturing RiskFactor Report, the top 100 U.S. manufacturers unanimously cited supply chain concerns as a key business risk for the third year running.

The manufacturing industry has been hit hardest by ransomware, with 54 percent of manufacturers reporting an attack, according to a recent survey by security company KnowBe4.

According to the latest survey from consulting firm J.D. Power, 21 of 33 automakers in the survey improved car quality. Scores improved 6 percent over 2015, marking the biggest jump in seven years.

Forty-seven percent of distributors report increasing their staff in the last 12 months, while 22 percent have reduced their staff in the same time, according to Industrial Distribution’s annual Survey of Distributor Operations.

Activity in the manufacturing sector expanded for the fourth month in a row in June, according to the Institute of Supply Management’s Report on Business.

This article originally appeared in BDO USA, LLP’s “Manufacturing & Distribution” newsletter (Summer 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com

Templeton & Company Receives Peer Review PASS Rating

West Palm Beach, Fla. – December 14, 2016 – Templeton & Company, LLP has successfully completed a rigorous peer review of its accounting and auditing practice. The reviewer concluded the firm complies with the stringent quality control standards set by the American Institute of Certified Public Accountants (AICPA), the national organization for Certified Public Accountants in the United States.

The peer review of Templeton & Company was performed by a team of licensed, independent CPAs who qualified under the program’s requirements for service as a reviewer. The objective of the peer review is to determine whether a CPA firm has suitable quality control policies and procedures and is complying with them.

Its unmodified report indicates Templeton & Company measures up to the accounting profession’s high standards of quality and professionalism.

For more than 25 years Templeton & Company has been dedicated to providing the highest quality audit, tax and consulting services to their clients. The firm employs more than 60 professionals and has expanded to three South Florida office locations.

The AICPA is the national professional organization of CPAs with more than 412,000 members in public practice industry, government and education. AICPA members are committed to the highest standards of quality, independence, and ethics in their practice. In its continuing efforts to serve the public interest, the organization sets audit standards, upholds the profession’s code of conduct, provides continuing professional education, administers peer review programs, and prepares and grades the Uniform CPA Examination.

About Templeton & Company

Founded in 1990, Templeton & Company, LLP is a professional services firm providing comprehensive business solutions to help its clients discover and realize their vision for success. Located in Fort Lauderdale, West Palm Beach, and Wellington, Fla., the firm provides consulting services to businesses in multiple industries with a focus on audit, tax, technology, accounting, succession strategy, and business valuations. Templeton & Company is also an independent member of the BDO Alliance USA, a national network of leading CPA firms. For more information about Templeton, its people, services, experience, and alliances, visit www.templetonco.com.

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Telemedicine and Potential Tax Implications for Tax-exempt Providers

By Sandra Feinsmith, CPA, and Laura Kalick, JD, LLM in Taxation

It is hard to believe that telemedicine has been a clinical reality for almost 60 years, if you count from the literally space-age technologies NASA developed to monitor astronauts’ health in the 1960s. Physician/technician collaboration expanded in following years with programs like NASA’s Space Technology Applied to Rural Papago Advanced Healthcare (STARPACH) program, which linked paramedical professionals on the remote Papago Indian Reservation with doctors in Phoenix and Tucson via two-way microwave audio and video link. And in 1999, telemedicine pioneer Medical Missions for Children was founded, an entity that now serves children in remote areas in over 100 countries.

Now telemedicine has both expanded in availability and contracted to a more local level, becoming an important part of many hospitals, home health agencies, private physician practices, as well as our homes. In 2015, according to the American Telemedicine Association, more than 15 million Americans received some type of remote medical care via technologies such as remote monitoring, video conferencing with physicians and smart phone chronic disease management apps.

It may be even harder to believe, then, that in those 60 years, the Internal Revenue Service (IRS) hasn’t yet settled on a way to tax telemedicine—a lingering question that exposes the providers exploring it to potential audit and accounting risks.

A clear benefit to care and costs… with less-than-clear tax implications

Telemedicine has become an increasingly relevant business driver because its benefits complement the demands of an era of digital advances, increased consumerism by patients and pressure to reduce overall healthcare costs. It can reduce wait time, travel time and stress levels for patients; facilitate lower-cost preventive care and chronic care management; and allow specialty services to be more broadly distributed to new patients by (virtually) bringing specialists to remote and rural areas.

Yet the potential tax implications from both the federal and states’ perspectives are unclear, particularly as they relate to unrelated business income (UBI).

The IRS defines UBI as income from a trade or business that is regularly carried on by a tax-exempt organization and that is not substantially related to the organization’s exempt purpose.

To date, the IRS has not issued any guidance or rulings regarding telemedicine UBI, specifically. For now, tax-exempt healthcare organizations participating in telemedicine are subject to the IRS rules and principles that apply more broadly to UBI and healthcare activities—some of which, frankly, don’t neatly fit, and some of which require careful documentation to avoid triggering UBI status.

Traditionally, the IRS has focused on whether an individual is receiving a healthcare service or an ancillary service. Healthcare services to individuals are considered substantially related to a hospital’s exempt purposes. On the other hand, if the service is an ancillary service, such as diagnostic lab testing or the provision of pharmaceuticals, then the income is excluded only if the person is a patient of the hospital, and then this is based upon an exception to UBIT for the convenience of the hospital’s patients. There are also exceptions for casual sales or services to small hospitals at or below costs.

What makes a patient… a patient?

Interestingly, most of the tax uncertainty of UBI comes not from the definition of “telemedicine” but from the formal definition of “patient.” IRS Revenue Ruling 68-376 defines a patient as:

  • A person admitted to a hospital as an inpatient
  • A person receiving emergency or preventive health services from outpatient facilities of a hospital
  • A person referred to a hospital’s outpatient diagnostic facilities for a specific diagnostic procedure. The procedure is administered by a hospital-based practitioner affiliated with the hospital.
  • A person refilling a prescription written while in the course of treatment at the hospital
  • A person receiving medical care in a hospital affiliate
  • A person receiving care in his home where the services are rendered by, and under the supervision of, the professional staff of the hospital as an extension of its inpatient and outpatient care

In this current definition, the operative theme appears to be either that the person is or has been physically in the hospital or an affiliate, or that the person is receiving care or treatment by a hospital professional. Therefore, the question becomes whether the person receiving remote care delivered by a hospital physician or hospital professional becomes a patient of the hospital or, more significantly, is the service being provided considered substantially related to the hospital’s healthcare mission.

In telemedicine, of course, the entire point is often to deliver care outside the traditional setting.

Given the uncertainty, tax-exempt healthcare organizations must be diligent in documenting how the care provided meets the organization’s exempt purpose by:

  • Maintaining detailed medical records
  • Showing how the organization is serving the needs of the community
  • Documenting any direct interaction between physicians and the patient, or
  • Written treatment consent (provided or secured or authorized)

Another piece of evidence may be whether the malpractice insurance covers the activity.

Further, state-level definitive tax guidance has not been issued in this area. Currently, as the federal government is doing, states are following traditional rules in regards to UBI. From most states’ perspective, if any of the telemedicine activity generates UBI and crosses state lines, the income may require apportionment among the states based on activity in the respective states and the hospital may have to file a tax return in that state. The organization needs to address where the sale of the personal services occurs, where the patient is located and where the services are being performed. Some states look to where the cost of performance are incurred, and other states look to where the time is spent performing the services in determining if there is nexus and requirements to report items in those states. While the provision of a cyber space consultation may be considered related to exempt purposes, questions could arise as to whether the sale of pharmaceuticals to the out-of-state patient creates UBI and also, whether the sale is subject to sales tax.

As the traditional patient and nonpatient criteria for determining UBI is dated, so both the IRS and the states need to re-examine the definitions of a patient as well as the definition of providing healthcare services.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com

FASB Issues ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities

By Lee Klumpp, CPA, CGMA and Tammy Ricciardella, CPA

The Financial Accounting Standards Board (FASB) released the Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities on Aug. 18, and you can read the full ASU here.

The standard aims to improve presentation of financial information, ultimately making not-for-profit financial reporting statements more informative, transparent and useful to donors, grantors and other users. This is the first major change to the nonprofit financial statement model in over 20 years.

ASU 2016-14 impacts all not-for-profit entities in the scope of Accounting Standards Codification (ASC) Topic 958. The ASU addresses the following key qualitative and quantitative matters:

  • Net asset classes
  • Investment return
  • Expenses
  • Liquidity and availability of resources
  • Presentation of operating cash flows

In addition, the ASU includes illustrative financial statements for not-for-profit entities, which reflect changes made by the new standard.

Net asset classes:
The effects of the ASU on net asset classes are as follows:

  • The current presentation of three classes of net assets (unrestricted, temporarily restricted and permanently restricted) is replaced with two classes of net assets–net assets with donor restrictions and net assets without donor restrictions. The totals of these two required net asset categories must be reported in the balance sheet and the changes in these two net asset categories must be presented in the statement of activities. However, this is a minimum presentation requirement. An entity may choose to disaggregate within these two net asset categories.
  • The current requirement to provide information about the nature and amounts of different types of donor-imposed restrictions is retained and includes the need to highlight how these restrictions affect the use of the resources and their impact on liquidity.
  • Changes the net asset classification of underwater amounts of donor-restricted endowment funds to net assets with donor restrictions and requires additional disclosures related to these underwater endowment funds.
  • Eliminates the over-time approach for the expiration of restrictions on capital gifts and requires the use of the placed-in-service approach in the absence of donor explicit stipulations otherwise.

Investment return:
The ASU requires the following items with regard to investment return (relates to total return investing and not programmatic investing):

  • Investment return should be presented in the statement of activities net of all related external and direct internal expenses. The ASU provides definitions and examples of what qualifies for direct internal expenses to assist entities with this presentation.
  • The current requirement to disclose the netted investment expenses has been eliminated.

Expenses:
All nonprofit organizations currently must present expenses by function. The ASU introduces
a requirement to present expenses by nature and function, as well as an analysis of these expenses in one location by both nature and function. The intent is to provide additional information to the users of the financial statements regarding how the nonprofit uses its resources. This analysis can be presented in the face of the statement of activities, as a separate statement (not a supplemental statement) or in the notes to the financial statements.

  • This analysis should be supplemented with enhanced disclosures about the allocation methods used to allocate costs among the functions.

Liquidity and availability of resources:
To improve the ability of financial statement users to assess a nonprofit entity’s available financial resources and the methods by which it manages liquidity and liquidity risk, the ASU contains specific disclosures including:

  • Qualitative information that communicates how a nonprofit entity manages its liquid available resources to meet cash needs for general expenditures within one year of the balance sheet date.
  • Quantitative information that communicates the availability of a nonprofit’s financial assets to meet cash needs for general expenditures within one year of the balance sheet date. Items that should be taken into consideration in this analysis are whether the availability of a financial asset is affected by its nature, external limits imposed by grantors, donors, laws and contracts with others, and internal limits imposed by governing board decisions.

Presentation of Operating Cash Flows:
The ASU maintains the option for nonprofit organizations to present their statement of cash flows on either the direct or indirect method of reporting. If an organization chooses to use the direct method, the reconciliation of changes in net assets to cash provided by (used in) operating activities is no longer required.

Effective Date of ASU:
The amendments in ASU 2016-14 are effective for annual financial statements issued for fiscal years beginning after Dec. 15, 2017 (2018 for calendar year ends and 2019 for fiscal year ends), and for interim periods within fiscal years beginning after Dec. 15, 2018. Application to interim financial statements is permitted but not required in the initial year of application. The amendments in this ASU can be adopted early. Entities presenting comparative financial statements must apply the amendments retrospectively; however, the following optional practical expedients are available for periods presented prior to adoption. For prior periods presented organizations can opt not to include:

  • The analysis of expenses by nature and function and/or,
  • Disclosures related to liquidity and availability of resources.

Actions to Take Now:

  • Read through the ASU and watch for further alerts from BDO with more details related to the implementation of this ASU.
  • Discuss the new ASU with your audit committee, board members and external auditors to prepare for the changes introduced.

On the Horizon
This ASU completes the first phase of the FASB’s project to improve the financial reporting of not-for-profit entities. As we have discussed in earlier newsletters, the FASB determined that a second phase would consider other potential changes that are likely to require more time to resolve, including potentially reconsidering intermediate operating measures and certain other enhancements.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com

PErspective in Manufacturing

The housing market remains a bright spot in the U.S. economy this year after a similarly robust 2015. Housing construction is booming and U.S. construction spending reached its highest level in March in more than eight years, according to the New York Times.

Both the residential and commercial sides are making gains. Inventory is tight and, with demand exceeding supply, home prices are climbing and new home starts are on the rise. As a result, construction job numbers are up, and builder sentiment is positive, MarketWatch reports. With interest rates still low and fewer rate hikes expected than previously predicted, mortgage rates remain at historically low levels, adding to the positive construction environment.

This recent uptick in building has boosted sales of construction products, turning manufacturers of these products into attractive takeover targets for private equity firms and strategic buyers alike, according to The Middle Market. Our Q1 Manufacturing & Distribution M&A Outlook and Review notes that the while the general economy tends to ebb and flow in four- to seven-year cycles, the building products industry appears to be in year four of a 10-year cycle and deal flow in the sector is active.

Innovative Chemical Products—backed by Audax Private Equity—acquired adhesives maker Fomo Products in April for an undisclosed sum. Fomo manufactures adhesives, sealants and spray foam products, making it a natural fit for ICP, which makes coatings and adhesives for the construction, packaging and printing sectors. Also in April, Nautic Partners-backed IPS—a global manufacturer of adhesives, solvent cements and specialized plumbing products—purchased Integra Adhesives from management in its fifth acquisition since becoming a Nautic VII portfolio company in February 2015. And Z Capital Partners bought Twin-Star International, a designer and manufacturer of electric fireplaces, heaters and home furnishings.

Strategic investors have also closed a number of deals in the last year. Quanex Building Products paid $248 million for cabinetmaker Woodcraft Industries in November, while last August, Summit Materials bought gravel-pit operator LeGrand Johnson Construction, which will become part of Summit’s Kilgore Companies business in Utah. Door manufacturer Masonite International bought privately held USA Wood Door last October for $13 million and door-kit maker National Hickman for $82 million last August.

The Middle Market predicts that building products M&A will remain strong through 2016, as the prospect for a continued housing recovery remains strong. Private equity firms interested in middle market companies may continue to find opportunities in the building products sector and those entering now could be poised to enjoy even greater growth.

Sources: Forbes, Furniture World, MarketWatch, Mergers & Acquisitions, Modern Distribution Management, New York Times, NREI Online, The Wall Street Journal.

Future PErspectives:
What’s Up Next for Manufacturing Investors

Strong appetite for M&A in the manufacturing sector has persisted following an active year of deals in 2015—industrial manufacturers announced a record-level transaction volume of $1.3 trillion in Q4 2015, according to commercial real estate services firm JLL. Several factors indicate that deal activity in the sector will remain steady, including the need for geographic expansion and strong demand in the housing market, reports Mergermarket. However, as we near the upcoming presidential election, investors will likely approach the space more cautiously due to uncertainties around the impact of future regulation on deals. In fact, investors are more optimistic in manufacturing industry deals over the long term than the short term. In Mergers & Acquisitions’ Mid-Market Pulse (MMP), survey respondents gave manufacturing deals a 12-month forward-looking sentiment score of 61.4, compared to the three-month sentiment score of 59.7. That said, consolidation in the building materials and construction sectors ramped up in May 2016, notes Modern Distribution Management, highlighting the large role that deals will continue to play in the building products sector for the foreseeable future.

This article originally appeared in BDO USA, LLP’s “Manufacturing & Distribution” newsletter (Summer 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com

Pending Nonprofit Tax Legislation: What’s on the Way?

By Laura Kalick, JD, LLM in Taxation

Although tax legislation will likely wait until after the presidential election, Congress continues to introduce bills for when that day comes. Previous bills and budget proposals have attempted to reduce the benefits of the charitable deduction for taxpayers. The charitable sector demonstrated in numerous hearings that such a reduction would have a significant adverse impact on organizations’ ability to provide needed services. And now, Congress is exploring actions that could help protect the charitable deduction.

Senator John Thune (R-S.D.) introduced S. 2750 CHARITY Act (Charities Helping Americans Regularly Throughout the Year). This bill conveys that the goal of tax reform should be to encourage charitable giving, and Congress should ensure that the charitable deduction endures through a comprehensive rewrite of the tax code. The bill includes the following provisions:

  • The Individual Retirement Account rollover from charities would be available for a rollover from a donor advised fund;
  • The excise tax on private foundations’ investment income would be reduced to 1 percent;
  • In order to enhance transparency, all Forms 990 would be filed electronically;
  • The mileage rate for charitable volunteer services using an automobile would match the rate for medical expenses; and
  • An exception to the excess business holding rules would allow a business received by a private foundation through a will or trust to be held by the charity if the business’s profits go to the charity.

Senator Tom Udall (D-N.M.) introduced S. 2648, Create Act of 2016, which includes a special rule allowing a donor who makes a qualified artistic charitable contribution (i.e., literary, musical, artistic or scholarly work, or contributes the copyright to a charitable organization) to deduct the fair market value of the contribution from gross income.

On the House side, “Preventing IRS Abuse and Protecting Free Speech Act” (HR 5053), introduced by Peter Roskam (R-Ill.-6), was passed. This bill prohibits the Internal Revenue Service from requiring a tax-exempt organization to include in annual returns the name, address or other identifying information of any contributor. The bill includes exceptions for:

  • Required disclosures regarding prohibited tax shelter transactions; and
  • Contributions by the organization’s officers, directors or five highest compensated employees (including compensation paid by related organizations).

As the sector stands by during the final months of election season, we’ll be watching and waiting for more developments in tax legislation.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com

Could a Lack of Skilled Labor Slow the Reshoring Wave for U.S. Manufacturers?

By Tom Stringer and Michelle Cammarata

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U.S. manufacturing is on the rebound, having added more than 730,000 jobs since the end of 2010. And industry analysts expect the sector to create at least another 700,000 jobs by the end of the decade, according to the Manufacturing Institute.

Many of these jobs are the result of the return of operations to the U.S. from abroad, also known as reshoring. Companies are exhibiting a strong commitment to reshoring, and a December 2015 study by The Boston Consulting Group found that:

  • 54 percent of companies with more than $1 billion in revenue are considering reshoring
  • The share of executives saying that their companies are actively reshoring production increased by 9 percent since 2014 and by almost 250 percent since 2012
  • Of manufacturers planning to add production capacity over the next five years for goods consumed in the U.S., more plan to add that capacity in the U.S. than in any other country

Perhaps no company has had a bigger impact on the reshoring trend than Walmart. The retailer has committed $250 billion to U.S.-made goods over the next decade and reshored 4,444 jobs between 2010 and 2014, according to the Reshoring Initiative. This has set in motion a chain reaction, as suppliers are reshoring their own operations to serve the retail giant.

U.S. automakers are also making significant investments. Ford, second only to Walmart in reshoring over the past five years, brought 3,250 jobs from Mexico to Michigan and Ohio and moved 1,800 jobs to Tennessee. General Motors also brought 1,800 jobs from Mexico to U.S. plants, according to analysts at the Reshoring Initiative.

Reshoring is strongest in the Southeast and Texas. Companies building new facilities frequently choose right-to-work states with comparatively lower wages and business taxes. Companies that move operations to other regions typically choose existing factories with excess capacity. For example, in 2014, Whirlpool announced it would relocate production of KitchenAid small appliances from China to an existing facility in Greenville, Ohio, adding 400 workers.

WHY BUSINESSES RESHORE JOBS

Costs

Two major costs—labor and energy—are dramatically reduced for many companies when they reshore. The cost of labor in China has increased 320 percent since 2000, according to the Reshoring Initiative. Gas and oil prices, volatile in other countries, have been lower and more stable here in the United States, and few predict that will change in the near term.

Logistics

Reshoring shortens the supply chain and cuts time to market, helping companies be nimbler.

Brand Building

Businesses boost their brands when they can market their products as “Made in America.” Companies enjoy better quality control and access to skilled labor, which can improve the product, further strengthening their brands.

WHO WILL FILL THE JOBS?

Add existing manufacturing sector growth, plus reshoring, plus the pending retirement of the baby boomers, and U.S. manufacturers say there will be as many as 3.5 million job openings over the next 10 years, according to a 2015 GE Reports study by General Electric. Meanwhile, according to the Reshoring Initiative, there are still 3-4 million manufacturing jobs abroad, offering a chance for enormous economic growth if reshoring continues.

The U.S. might not have enough skilled manufacturing labor—today or in the pipeline—to meet this demand. Several factors contribute to the gap:

Perception

After years of layoffs, plant closings and relocations to emerging markets like China and Mexico, the industry has struggled to attract younger talent. While initiatives like Manufacturing Day are making strides to cultivate a new generation of manufacturers, a 2015 study from the Manufacturing Institute reports that just 37 percent of parents would encourage their children to pursue careers in manufacturing.

Demand for technical skill

U.S.-based manufacturing jobs today focus on operating, maintaining and programming high-tech machines. Employers need problem solvers with strong technical skills. Unfortunately, inadequate investment in manufacturing education, vocational schools and community colleges, along with a decline in apprenticeship programs, have contributed to the skills gap.

Wages

Concerns about wages may push otherwise qualified workers away from a manufacturing career. While automakers have reshored jobs, for example, some have moved to areas where wages and benefits are lower. Increases in manufacturing pay are struggling to keep pace with the influx of jobs to fill.

Experts note that these hurdles are not insurmountable, and several strategies are already yielding progress. As the cost of doing business abroad continues to rise, manufacturers are heading home to take advantage of lower costs, more efficient logistics, stronger protections for intellectual property and a boost to their brands. Job opportunities abound for employees with the technical skills and problem-solving ability to operate and maintain high-tech equipment and engineer new products. By collaborating to offer educational programs and apprenticeships, leaders in business and government can grow the skilled workforce to keep pace with the rapid growth projected for the manufacturing sector for years to come.

This article originally appeared in BDO USA, LLP’s “Manufacturing & Distribution” newsletter (Summer 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com