The Profit Statement Summer 2009
Asset impairment: What it
is and why you should care
Various Financial Accounting Standards certain debt or other contract covenants,
In This Issue
Board pronouncements require that certain impairment could even result in default.
assets be reported at fair value or tested n Asset impairment: What it
periodically to determine if their book value Many assets may be impaired is and why you should care 1
is greater than their fair market value. If The economic crisis has reduced market
n 6 ways to keep your business
book value exceeds fair value, an asset is value for many classes of assets, including
afloat in a stormy economy 1
deemed to be “impaired.” stocks, bonds, closely held businesses and
real estate. Therefore, it is now more likely Making the best of an
Why is impairment something to be con- n
that the fair value of such assets is less than economic downturn
cerned about? Because an impaired asset
what appears on the books of companies Tax planning for tough times 3
must be reduced to fair value on the com-
holding them.
pany’s books, and a corresponding impair- n Trying to cope with
ment loss must be taken on the company’s In fact, as of December 23, 2008, more business losses?
income statement or directly to stockholders’ than 25% of the companies in the S&P 500 Use an NOL deduction
equity. This means that an impaired asset were valued by the market at a discount to to gain something back 5
will adversely impact the company’s balance their accounting book value. This may be
sheet and, possibly, reported earnings. Under continued on page 2
6 ways to keep your business
afloat in a stormy economy
Captaining a successful company because they have a vested interest in 2. Run a tight ship
is never easy. But when sales slump, your company’s survival, they’ll be quick to According to the Association of Certified
receivables lag and lenders get Scrooge- suggest ways to operate more profitably — Fraud Examiners, the average business
minded, staying profitable is particularly if you ask them. loses 7% of its revenue to occupational
challenging. Here are some ways to keep fraud. So make sure you take steps to pre-
So let them know about the need to curb
your business from going under in rough vent fraud, especially the two most preva-
spending, and get their ideas for ways to
economic seas. lent types: corruption and fraudulent billing
reduce expenses and increase productivity.
schemes. Reduce these threats by imple-
Honor frugal crew members by noting in
1. Ask your crew to help menting sound hiring practices (including
a companywide e-mail or newsletter what
Because they are personally involved in background checks on new employees)
they’ve done to control costs, and provide
the details of your company’s operations, and solid internal accounting controls.
rewards for ideas that increase efficiency or
employees often know best how to cut
boost profitability.
costs and do things more efficiently. And continued on page 4
Kerry Balagtas n (301) 280-2730 n kerry.balagtas@reznickgroup.com n www.reznickgroup.com
The Profit Statement 2
Asset impairment... n Financial instruments (assets and Recoverability model. Upon certain
continued from page 1 liabilities) elected to be carried at fair triggering events, companies report the net
an indication that the reported asset bal- value under SFAS No. 159, The Fair realizable value — the amount recoupable
ances are impaired and that adjustments in Value Option for Financial Assets and from the sale of an asset in a current trans-
reported value will be required. Financial Liabilities. action, less the selling costs to dispose of
the asset. Assets that must be tested under
Fair value impairment testing.
a recoverability model include:
Impairment testing On an annual basis or upon a triggering
and reporting rules event, such as loss of a key customer n Component and finished product
In light of Statement of Financial or a significant change in the business inventory,
Accounting Standards (SFAS) No. 157, Fair climate, companies must test for impair- n Land and home inventory that is held
Value Measurements, and greater attention ment and report decreases (only) in for sale, such as completed but unsold
to impairment by both regulators and the fair value if the book value of an asset homes, and
financial press, auditors now consider fair exceeds its fair value. Assets that must
n Assets the company acquired with the
value a high-risk area and will be placing be tested under a fair value impairment
intent to sell.
greater importance on impairment measure- testing model include goodwill and
ments. To help you avoid financial reporting intangible assets, such as trademarks, Special rules. Certain assets are given
surprises, here’s a summary of the different with indefinite lives. very specific rules for evaluating impair-
approaches used to test for and record ment. For example, loans receivable (that
Multistep process. Upon triggering
impairment for various types of assets: do not have observable market prices) can
events, such as significant deterioration
be tested by:
Fair value reporting. On specified in operations or the market outlook, com-
dates, companies must report both panies first test whether the book value 1. Comparing the sum of the loan’s
increases and decreases in the fair value of an asset can be recovered based on expected cash flows, discounted to
of their assets. Changes in fair value are the asset’s expected undiscounted cash present value, to the effective rate of
reported either in earnings or, for certain flow. If that test fails, they must evaluate the loan note rate;
assets, directly to stockholders’ equity. impairment of the asset under a fair value 2. Comparing the fair value of the collat-
Assets that must be reported under a fair model. Assets tested under a multistep eral, if the loan is collateral dependent,
value model include: process include: to the book value of the loan; or
n Investments in marketable (traded) n Land inventory held and used, or 3. Aggregating loans and comparing
equity securities, under development, historical results on similar loans to
n Marketable debt securities held for n Operating properties, such as company their carrying values.
trading and available for sale, headquarters, It’s not clear whether cost and equity
n Derivatives (options, warrants, for- n Income-producing properties, such as investments (generally, less than 20 percent
wards, swaps and caps) and embed- rental properties, and ownership interests) in closely held busi-
ded derivatives, n Finite-lived intangible assets, such nesses must be tested under a recoverability
n All assets of companies that are as customer relationships and non- model or a fair value model. However, more
treated as investment companies, and compete agreements. and more auditors are requiring a fair value
model that requires a complex valuation of
Editorial Board the noncontrolling ownership interest under
SFAS 157.
n Atlanta n Chicago
Kenneth E. Baggett, CPA Jarvis H. Friduss, CPA
Don’t be caught unaware
404.847.9447 847.324.7500
Understanding and implementing the
n Baltimore n Sacramento rules for reporting fair value and impairment
William T. Riley, Jr., CPA Beth Mullen, CPA
are important to avoid adverse audit find-
410.783.4900 916.442.9100
ings and other unwelcome consequences.
n Bethesda n Tysons Corner To determine whether your assets are
Managing Editor Ernie Sanders, CPA impaired, or for more information about
Kerry Balagtas 703.744.6700
SFAS 157 requirements, please contact
301.280.2730
Brent Solomon at 301.280.3660 (Brent.
n Charlotte Solomon@reznickgroup.com) or Jordan
Anthony V. Portal, CPA
Klinger at 301.907.2324 (Jordan.Klinger@
704.332.9100
reznickgroup.com). n
3
Making the best of an economic downturn
Tax planning for tough times
While there isn’t much you can do to to help you with this.) If a Roth IRA seems
reverse the economic slump, you can take best, converting a traditional IRA may be a
steps to minimize your income, gift and good strategy, especially now while many
estate taxes. That can lead to a better finan- asset values are depressed.
cial situation for you personally even if the
When you do a Roth conversion, you
economy is slow to improve. Let’s look at
have to pay taxes on the amount you
some strategies that can make these times
convert. But if your IRA assets have depre-
a little less tough.
ciated in value in recent months, you’ll
minimize the tax cost while maximizing
Turn losses into tax savings
potential tax-free growth when the econ-
If you’re holding poor-performing invest-
omy rebounds.
ments, consider selling them to “harvest”
the losses. You can use these losses to
Give assets to loved ones
offset up to $3,000 in ordinary income
The struggling economy creates some
plus any capital gains you recognize this
estate planning opportunities. By leveraging
year. Also, unloading losers gives you an
depressed asset values and rock-bottom
opportunity to replace them with invest-
interest rates, you can transfer substantial
ments expected to yield better returns. retirement accounts. If you don’t, you’ll
amounts of wealth to your children or other
suffer a tax penalty equal to 50% of the
Alternatively, you can carry losses forward heirs at minimal tax cost.
amount you should have withdrawn.
to future tax years. If you’re expecting to
For example, you can minimize gift
move into a higher tax bracket in the next Congress suspended the RMD require-
taxes by transferring real estate, stocks or
few years, you may want to wait to “use” ment for 2009 to soften the blow of the
other assets whose values have declined.
your losses until they’ll save you more. economic downturn. Unless you need the
Other transfer tools that allow you to
money for living expenses, consider skipping
take advantage of low asset values and
Take advantage of RMDs this year, leaving more money in your
interest rates include grantor retained
retirement tax breaks retirement accounts to grow tax free.
annuity trusts, charitable lead annuity
Contributions to IRAs, 401(k) plans and
trusts, intentionally defective grantor
other tax-deferred savings vehicles reduce Convert to a Roth IRA
trusts and intrafamily loans. (See “Why
your adjusted gross income (AGI). As a Traditional IRAs offer current tax deduc-
you should a lender be” below.)
result, they not only lower your taxable tions and tax-deferred growth. But when
income but may also increase deductions you or your heirs take distributions, the
Act now
(although the deductions phase out above funds are subject to ordinary income taxes.
Although many of these strategies will
certain AGI levels). If you can afford to, Contributions to a Roth IRA, on the other
remain effective even when the economy
put the maximum amount allowed into hand, are nondeductible, but qualified
recovers, you may need to act soon to
these accounts so you can max out on distributions of contributions and earnings
derive the greatest benefit from them.
tax savings, too. are tax free.
Please check with us to learn how you can
For 2009, you can contribute up to To determine which IRA is best for you, make the best of these recessionary times
$16,500 to your 401(k) plan ($22,000 you’ll have to consider your expected to both save tax and more fully achieve
if you’re age 50 or older). Depending on investment returns and the benefits of your wealth transfer and estate planning
such factors as your AGI and whether you paying the tax now or later. (We’d be glad objectives. n
participate in an employer-sponsored retire-
ment plan, you may also be able to contrib- Why you should a lender be
ute $5,000 to your traditional or Roth IRA One of the most effective estate planning strategies in a low-interest-rate
($6,000 if you’re age 50 or older). environment is the intrafamily loan. To avoid gift taxes on a loan to a family
member, you must charge interest at or above the applicable federal rate (AFR).
Hold off on RMDs AFRs have dropped to their lowest levels in decades. So if your borrower (a
When you reach age 701/2, you must son or daughter) places the funds in investments that outperform the AFR,
take annual required minimum distribu- the money left over after repaying the loan will essentially be a tax-free gift.
tions (RMDs) from IRAs, 401(k)s and other
4
… keep your business afloat …
continued from page 1
Also, let your crew know that you won’t
tolerate fraud. If you suspect fraudulent
activity, bring in a forensic accountant to
investigate it and, if necessary, prosecute
the perpetrator to demonstrate you mean
business.
3. Keep your sails up
While you need to keep an eye on the
economic winds, you don’t have to stay
the sails, batten the hatches and ride things
out until the weather improves. Instead,
it’s time to be proactive in maintaining
good communication with suppliers and
customers. A good supplier may help you
through some tough times by extending
credit or setting up a workable payment
plan, if you’re up front with them about
your situation.
Also, strengthen bonds with good cus-
tomers and referral sources. By working
to serve customers in additional ways and
rewarding referrals, you’ll likely increase
revenue. In addition, try to create new to come by, consider an asset- or equity- n The client is satisfied and there are no
business alliances wherever you can. The based loan. An asset-based loan is secured unknown issues, and
more people who know what you offer by the value of your company’s inventory, n Payment will be issued by the due date.
and can tell others about you, the more accounts receivable, equipment or real
business you’ll have. estate. An equity-based loan is secured by It may not be practical to do this with all
an ownership interest in your company. customers. But if you focus on those that
Although you’d probably prefer an unse- account for the majority of the total dollars
When credit is tight, you coming due soon, you’ll be more likely to
cured loan, don’t let a lack of money leave
may do best with local you dead in the water. avoid unpleasant surprises.
lenders, such as smaller
When credit is tight, you may do best 6. Avoid price wars
regional banks, credit
with local lenders, such as smaller regional To keep existing customers and boost
unions and private investors. banks, credit unions and private investors. sales, you may be tempted to lower your
To increase your chances of getting a prices. But cutting margins so low that
loan, develop a strong loan package that even the slightest mistake can result in
Above all, don’t stop marketing or includes: a business plan, a competitive financial disaster isn’t a good idea. Price
investing in new technologies, especially analysis and a complete set of financial cutting often leads to reduced profitability,
if those activities are the lifeblood of your statements, as well as an analysis of your so a “steady as she goes” approach may
business. When your markets are shrink- business’s strengths, weaknesses, opportu- be best, even if you lose a few customers.
ing, you need to do more, not less, to stay nities and threats.
competitive. Take advantage of all available In fact, if you can find ways to pass along
governmental tax incentives, deductions 5. Don’t run aground on receivables costs to your customers without pricing
and credits to quickly and positively impact Keeping watch for problem accounts can yourself out of the market, you may want to
your company’s bottom line. (Check with enable you to avoid getting stuck on them. take that tack. For example, shipping costs
us to make sure you don’t miss any.) For example, call a customer before an have increased considerably over the past
invoice becomes due to make sure that: year, so customers won’t be surprised to
4. Keep your treasure chest full pay more for shipping. If you’ve not raised
If a cash influx is needed to run or grow n The invoice has been received and your standard shipping charge for a while,
your business and money seems hard processed for payment, now may be the time. n
5
Trying to cope with business losses?
Use an NOL deduction to gain something back
In a recession like the one we’ve gone into a higher tax bracket, you may want passive business losses against nonpassive
through this year, many businesses have to save your NOLs to reduce your future income, such as wages, interest, dividends
found that their deductible expenses are tax liability. and capital gains. However, disallowed
exceeding their income. If yours is one of passive losses may be carried forward to
You may even elect to both carry back
them, you’ll likely end up with a net operat- offset future passive income.
and carry forward NOLs. But you must first
ing loss (NOL) for your 2009 tax year.
carry back losses to the earliest tax year
Consider AMT impact
While that isn’t good news, it may not be for which you qualify before you can carry
Like individuals, businesses are subject
quite as bad as it seems. That’s because forward any remaining losses.
to the alternative minimum tax (AMT), an
you can carry back the loss to offset
alternative tax system that calculates tax
income in a previous year or carry it for- Business structure matters
liability differently. You must pay the AMT
ward to a future year. If you choose to carry If your business is a C corporation, the
if your AMT liability is greater than your
back the loss, you may be able to obtain net operating loss occurs at that level. If
regular tax liability.
an immediate tax refund — and that can your company is a pass-through entity,
provide a very welcome infusion of cash such as a partnership, S corporation or You can deduct NOLs from your AMT
when revenue is down. multiple-owner limited liability company income under similar rules as for regular
(LLC), losses are passed through to the income tax purposes. But, if you opt to
Which way should you go? partners, shareholders or members forgo a carryback period for regular tax
You generally can carry back an NOL and deducted on their individual tax purposes, you’ve automatically done so
no more than two tax years. For certain returns — but only to the extent of their for AMT purposes, too.
losses attributable to casualty and theft, adjusted tax basis.
the carryback period is three years. In presi-
Generally, the initial basis for pass-through Even though the NOL deduction
dentially declared disaster areas, as well as
entity owners is the amount they pay to cannot fully make up for losses
for certain other disasters, the carryback
acquire their interests, plus the adjusted
period for businesses is five years. Typically, due to the recession, or bad
basis of any property they contribute to the
it’s better to carry back an NOL so you can luck, it can lessen the pain and
company. During the life of the business,
claim a current refund. provide much-needed money
basis may be increased by the owners’
But you can carry forward unused losses shares of company income, subsequent for your business.
for up to 20 years. In some cases, such as capital contributions and other factors.
when you expect your business to move Conversely, basis may be reduced (though
not below zero) by the owner’s shares of Conversely, if you intend to use a
distributions, taxable losses and other items. carryback period for regular tax purposes,
you must also use it for the AMT. Note
The rules for adjusting basis vary by
that your AMT loss, and therefore the AMT
entity type. In a partnership, the partners
NOL, may be different from the regular tax
may in some circumstances deduct
NOL. So you’ll need to carefully consider
losses in excess of their investment in
the impact of your NOL decision on your
the company, because their tax basis is
total tax liability.
increased by certain partnership debt.
But an S corporation shareholder’s basis
With loss, less is definitely more
isn’t increased by corporate debt unless
Even though the NOL deduction cannot
the shareholder makes a loan to the
fully make up for losses due to the recession,
S corporation. Therefore, S corporation
bad luck, or poor business decisions, it can
shareholders generally can’t deduct
lessen the pain and provide much-needed
losses beyond their company investment.
money for your business. To maximize your
Also, at-risk rules make it difficult for LLC benefit, though, you’ll need to know the
members to deduct losses beyond their complex rules that govern this tax break.
company investment. (But their basis is So be sure to check with us to make sure
increased by company debt.) And passive- that you turn as much of your loss into gain
loss rules prohibit owners from deducting as you can. n
The Profit Statement 6
PLAN TO ATTEND
About Reznick Group Business professionals look to Reznick Group, a respected
leader in the real estate and affordable housing industry,
Reznick Group is a national leader in accounting, tax and business advisory to provide timely information and updates on the latest
services. We work in a broad spectrum of industries, including affordable trends and opportunities. Reznick Group conferences
housing, commercial real estate, emerging business and entrepreneurial offer networking opportunities with industry veterans,
presentations from thought leaders, and training sessions
enterprises, government agencies, nonprofit organizations, professional
on industry fundamentals.
services, Real Estate Investment Trusts (REITs), renewable energy, and
residential home builders. The following Reznick Group conferences will be held in
the coming months:
Ranked among the top 20 public accounting firms in the United States, Reznick
Group employs approximately 1,450 people and maintains 10 offices nation- Developer’s Conference
wide. Founded in 1977, our headquarters are located in Bethesda, Md. Reznick August 18 – 19, 2009
Atlanta, GA
Group is a Certified Public Accounting firm and a Professional Corporation.
Real Estate and Market Update II
To learn more about Reznick Group’s services, seminars and conferences,
November 18 – 20, 2009
or to view our insights on issues that may impact your industry, visit San Juan, PR
reznickgroup.com. Co-sponsored by Reznick Group, P.C., Nixon Peabody LLP
and IPED
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