On Tuesday, September 23rd, the Financial Management Association of New Hampshire (”FMA of NH”) hosted its first event entitled “Preparing for a Successful Liquidity Event in Today’s Volatile Markets“.  I am fortunate to be among the founders of FMA of NH and to have had the opportunity to participate in the panel discussion on this very timely topic.  Peter Alternative and Bas van der Brugge of Mirus Capital started the evening’s discussion with a recap of the current market environment for merger and IPO activity, and touched on the availability of funds from the venture and investment community.  Steven Bell, Senior Director of Finance at venture-backed Vertica Systems, Inc., also particpated on the panel and gave his corporate perspective of deal activity and funding availability [in the way of full disclosure, Vertica is also an MFA client].

The evening’s discussion has me thinking more and more about this topic.  Let’s make no bones about it - the IPO market quite clearly is closed for the time being and we don’t expect to see any liquidity from that market in the near term.  Similarly, our guests from Mirus painted a pretty bleak picture on the M&A front.  However, there was a contrast worthy of note, and I continue to see anecdotal evidence in the market that suggests that all is not lost.  For example, one might think that this is not the time to be raising new money from venture or angel investors.  But as Steve fairly pointed out, companies like Vertica that have a solid business strategy, sound leadership team, and a market solution that customers are clamoring for, can still raise equity with relative ease.

I have been taking note these past few weeks of a number of examples whereby emerging technology companies have closed on new rounds with new investors, not just inside rounds.  Cash-rich investors, not just VCs, are still on the hunt for new deals and are approving and funding new deals.  Private equity investors are closing on new funds and are adjusting their models to rely less on the debt markets to get deals done.  We also have clients receiving LOI’s as early as this week from strategic buyers at healthy multiples.  An LOI doesn’t mean a deal will close, per se, but I find it to be an amazing sign of optimism in a market such as this.

I won’t deny that these are extremely difficult times for anyone looking to raise capital or execute on an exit strategy - they are.  The options have been severly limited by market forces.  But opportunities abound  in both day to day operations (as noted in Carl Famiglietti’s recent post) and capital strategy if you’re ready for the challenge of finding the right investment partner.  I encourage every entreprenuer reading this blog entry to stay true to his or her vision, focus on execution and market penetration, and continue to forge the necessary relationships to ensure success.

A recent article in Accounting Today investigates a study on reporting practices by multinational companies, and seems to question the intentions of these filers.  Specifically, the report (conducted by the Government Accountability Office) concludes that current rules “influence company decision about how many workers to employ and how much to invest in particular activities and locations.”

One noteworthy comment from the article comes from GAO Chairman Max Baucus (D-Mont.):

I’ve said before that we will tackle tax reform in 2009 and this report underscores the need to review business taxes as part of our tax reform efforts in the next Congress. Simply put, I do not intend to allow U.S. multinationals to sidestep their fair share of taxes by moving income offshore.

This viewpoint may be grounded in sound information from the report, but reform is not necessarily the answer — the best recourse may simply be to clarify and better enforce the rules that exist.

Currently, the US has one of the highest corporate tax rates of any developed country in the world.  As a result, corporations looking to cut costs often determine where to set up business operations by looking to income tax rates as well as payroll and other costs associated with various jurisdictions.

But taking that measure does not exploit a loophole.  The Internal Revenue Code currently has significant rules that are specifically enacted to reduce the possibility of US taxpayers shifting income to foreign jurisdictions.  These include, but are not limited to, Subpart F rules, Transfer Pricing Rules and IRC Section 367, which governs transfers of property from the US to other countries.  Despite Senator Baucus’s quote, these rules make it very difficult for corporations to merely “sidestep their fair share of taxes by moving income offshore.”

That said, the rules are so complex that they are most likely applied differently by different corporations, depending upon how they interpret the rules relevant to their own particular fact pattern.

Back to the solution, then.  One thing the IRS could do is to provide better guidance as to how the rules should be applied.  A second thing would be to step up enforcement of reporting requirements currently in effect.  Proper reporting would provide the IRS with better information as to whether the rules were being applied properly.

Within the past month, the IRS has indicated they will start penalizing corporations for failure to file the necessary information returns.  Penalties have been applicable for many years, but have rarely been assessed.  Better enforcement could be the best way to help prevent any tax avoidance and clear up misunderstandings as to whether taxpayers are shifting income offshore to avoid taxes.

The volatility on Wall Street last week was another in a long line of events that is making for an historically unstable economic environment. However, in our line of work we see a lot of the activity on the front lines, and we want to emphasize that there is still business to win and still growth to attain. Despite a climate that is financially questionable relative to recent years, the capitalist nature of the country offers opportunities for businesses to thrive – even in anxious times.

Our latest audiocast is on this very subject, and I encourage you to give a listen below or download the mp3. Feel free to drop us a comment or an email if you have any questions…as always, we’re happy to engage in a discussion about what’s happening across the business landscape.

New M&A guidelines under FAS141R are taking effect in 2009, and there’s been some talk about how it might impact the deal process. In fact, this Accounting Today article cites a study by Deloitte that concludes “out of more than 1,850 executives, 40 percent said the revised standard would cause them to rethink deal strategy or have an impact on their planned deal activity.”

This doesn’t surprise me, as some of the pending changes will have a destabilizing effect on post-merger balance sheets. However, I also feel strongly that accounting challenges should never hold back a strategically sound deal. The accounting, valuation and auditing experts simply need to adjust to the new guidelines and structure deals accordingly – not forego or delay them.

Here are some of the significant changes headed our way:

1. Timing of deals and reporting

FAS141R provides a more stringent timeline for reporting business combinations, and if deadlines are missed then provisional amounts must be reported for incomplete terms. That means not having the most qualified information, which can lead to more serious issues down the road. Expanded disclosure requirements will make the deadlines even more difficult to meet and could force companies to speed through the process, so prioritize the planning process and have the right team in place early to avoid sacrificing quality and accuracy for speed.

2. Contingent consideration

The purchase price of a business combination now includes the fair value of contingent considerations. This change could significantly increase the upfront purchase price recorded on deal transactions, as well as increase the volatility of subsequent accounting. Given the major uncertainties as to future amounts and timing of payments of the contingent payment, the fair value of this liability may materially fluctuate over time as more information is obtained.

3. In-process R&D

Under previous regulations, companies could record the fair value of IPR&D as a period cost of a transaction. FAS141R, however, requires that it be recorded as an intangible asset on the balance sheet. If the IPR&D does not come to fruition, it will subsequently need to be written down to its fair value, potentially zero, resulting in an impairment charge to the income statement.

These changes and others will bring us closer to international standards, and they will in the end make for a clearer picture of deals. We’ll take a more in-depth look at FAS141R in an upcoming MFA Perspectives article, and we encourage you to check it out when it’s posted on our Thought Leadership page.

Well, it looks like we may be on our way.  After years of false starts and conjecture about U.S. adoption of - or complete convergence with - International Financial Reporting Standards (IFRS), the SEC issued a press release on August 27th entitled “SEC Proposes Roadmap Toward Global Accounting Standards to Help Investors Compare Financial Information More Easily“.  Despite this press release, a final decision as to whether the adoption of IFRS is in the best interest of the public is not expected until 2011, and U.S. issuers would not begin using IFRS before 2014.

While this development is significant in that it is the first time the SEC has publicly announced a roadmap for the use of IFRS, it doesn’t change my position on what should be done now. I’ve been reading a lot from the press and other news sources about the impending effect of IFRS on U.S. GAAP, and I’m not convinced that IFRS will be a reality any time soon in the U.S.  Call me a cynic, but the SEC gives itself a lot of wiggle room to delay (indefinitely, if it wishes to), and Chairman Cox doesn’t help the cause by using words like “cautious and careful plan”.

And remember folks…the SEC’s announcement will likely have an impact on private companies as well.  The chairman of the FASB, Robert Herz, has gone on record a number of times regarding the push to international standards, and the SEC’s actions will simply add fuel to that fire.  But similarly, the FASB is unlikely to allow the adoption of IFRS prior to the SEC, and thus any delays by the SEC will likely be reflected in actions by the FASB too.

Being the cautious and conservative CPA that I am, I continue to strongly advocate advanced education on the topic of IFRS and I still contend that companies do not want to, nor should they be, taken by surprise if/when IFRS becomes a reality here in the United States.  But I remain less convinced that this change will come about in the United States as “quickly” as outlined in the SEC’s proposed roadmap.

Time will tell, but as far as I’m concerned, the sky is not yet falling.

I’ve heard some describe the Sarbanes-Oxley Act as the accountant’s version of the full employment act. If that’s true, what does it say about the current state of revenue recognition guidance the in U.S.? Recognition of revenue was once a simple concept - did you ship product or provide a service? If so, you likely recorded revenue in connection with such a transaction. Over the decades, however, business has become complex (or did we complicate it for ourselves?), and the complexity of revenue recognition has evolved as well.

We have seen the SEC, FASB, AICPA and other standard setting bodies develop reams of pronouncements and discussion on the subject of revenue recognition. Recognition of revenue has become so complex that it is among the top five reasons SEC registrants file restatements of previously reported financial results.

The topic of revenue recognition is also among the most concerning of issues that auditors contend with when planning and performing an audit. The rules can vary markedly depending on whether you’re a manufacturer, distributor, contractor, software vendor, service provider, financial institution, airline, broker-dealer, etc., etc., and can vary further if you have contracts with multiple elements, return or refund privileges, stipulated shipping terms, etc. For instance, there are currently at least 25 different industry-specific revenue recognition rules contained within U.S. accounting literature, including separate guidance for airlines, casinos, the film business, mortgage banks, hospitals, and software companies. Needless to say, we accountants have our hands full when it comes to this subject.

Given all this, it was intriguing to me when I heard that the Financial Accounting Standards Board (”FASB”) has agreed to issue a discussion paper [PDF] later this year with an eye toward boiling down the myriad industry-specific rules into a single general standard. This would mean that the airline industry would recognize revenue in a manner similar to the software industry.

Does such a conceptual framework make sense? Perhaps it can, but I will be watching closely for the FASB’s discussion paper this October/November. Despite the volume of existing revenue recognition literature and despite it’s occasional imperfections, it is a body of knowledge that has carried the U.S. far. As my dad used to say, “don’t fix it if it ain’t broke”. Let’s make sure we’re focused on the necessary fixes and not implementing change for the sake of change.

New guidelines on fraud prevention tactics were issued this summer in a joint effort by the Association of Certified Fraud Examiners, the AICPA, and the Institute of Internal Auditors. You can check out a summary press release here; the general theme they convey is that companies need to do more to prevent fraud along a number of fronts:

Five key principles within the guidance address governance, risk assessment, fraud prevention and detection, investigation, and corrective action. Following the guidance will help ensure that there is suitable oversight of fraud risk management, that fraud exposures are identified and evaluated, that appropriate processes and procedures are in place to manage those exposures, and that fraud allegations are addressed in a timely manner.

The risk of fraud is substantial and the median loss amounts have been increasing steadily over the years. For that reason I certainly share the desire to alert company leaders to the risk, especially in the current economic climate. The pressures of fraud are increasing on individuals as consumerism meets a downturning economic environment. The credit crunch, falling housing prices and the pressures of a consumption lifestyle will turn the unlikeliest individuals to acts of misappropriation (more on that in this MFA audiocast).

Though trust and delegation of authority are integral parts of enabling an organization’s members to achieve truly remarkable levels of performance, the lack of oversight can also open up gaps that enable fraud. They can be closed, however, through sound management principles that create oversight mechanisms that will monitor activity, promote transparency, and ensure that the collective assets of the organization are protected from malfeasance.

Despite suffering loss, organizations still have the onus of proving it and recovering lost property, often without the active involvement of law enforcement. Public agencies have limited resources and are often diverted by other causes — and no preventive regulations will ever match the safeguards provided by sound management and a well laid out process.

Local PD’s don’t have the resources to conduct forensic audits, and state and federal agencies only commit to glamour cases. These glamour cases are often restricted to publicly traded companies, identity theft, defrauding investors and other public related matters…there are many gems in this area, but a regional standout was the TJX case that surfaced last year. Internal breaches of fiduciary responsibility, especially when they involve businesses, are often low on the law enforcement totem pole.

The most important starting point in fraud prevention is realizing that the responsibility rests squarely on management’s shoulders to minimize opportunities for a potential fraudster. These newly issued guidelines cite practical approaches to prompt responsible managers to institute appropriate control mechanisms into their organizations. Applying such principles of effective oversight can promote efficiency, create transparency and effectively mitigate an organization’s risks of fraud.

This summer marked the passage of some noteworthy tax reform in Massachusetts that will be on our minds as year-end strategies start to take shape. Specifically, Governor Patrick signed an Act Relative to Tax Fairness and Business Competitiveness that his office says will close some corporate loopholes while reducing income tax obligations.

Key components of the Act include a combined reporting element that goes into effect next year and will have a significant impact on multi-state operations accustomed to filing separate returns; Massachusetts conformity with federal business entity classification; and reduction in overall corporate tax rates beginning in 2010.

While the tax reform generates additional income for the state — up to $482 million, according to the Massachusetts Business Roundtable — the changes create an interesting balancing act for companies. Depending on the extent of local operations, they may need to look at how much their in-state infrastructure will affect their tax payments.

We will take a more indepth look at the reforms for our annual tax seminar in the Fall, and in the meantime will continue to monitor major developments that take effect in 2009.

A June forum on International Financial Reporting Standards (”IFRS”) held in New York saw some urgency around getting the United States aligned on timing and action steps for making a transition to IFRS.

For those new to the topic, migrating to IFRS will mean US companies will begin using the same reporting and disclosure guidelines that more than 100 financial markets around the world, such as Australia, the European Union, New Zealand and Israel, currently permit or require. While there are a number of similarities, there are also significant differences between IFRS and US GAAP (Generally Accepted Accounting Principles) — more on the finer points in this related audiocast and Perspectives article (click on the image above).

Assuming that the SEC continues its onward push toward convergence with IFRS, US companies may quickly find themselves unprepared unless they and their auditors begin to educate themselves now. Even the uniform CPA examination in the US is considering an exposure draft [PDF] that would incorporate new testing requirements of IFRS in the future.

For some, IFRS is the source of optimism for global growth, according to a study by the International Federation of Accountants (IFAC). The organization found that a move to IFRS is expected to boost business, as “approximately 50 percent of respondents said convergence to a single set of international standards…for [Small to Mid-Sized Enterprises] is important to economic growth in their countries.”

The American Institute of CPAs (AICPA) has been one of the most vocal proponents of raising awareness of IFRS. The AICPA recently launched www.ifrs.com as an information resource on the transition, and in April conducted a poll of CPAs to gauge expectations. While 55 percent of 1,240 respondents said that they expect the move to IFRS to directly impact their work, 59 percent said they have not begun to prepare for adoption. Most felt that three to five years was a reasonable time frame to ramp up. However, even more time might be necessary when one considers that public filers will need to report IFRS-processed numbers for three years of income statements and two years of balance sheets; arguably, one would have to start converting to IFRS now in order to be ready to report IFRS numbers in three to five years.

The SEC is currently reviewing a proposal to allow U.S. companies to file under IFRS voluntarily, with a mandated deadline to be set in the future. With these wheels in motion, CPAs are already preparing for IFRS and companies looking to compete across borders will be better armed for global business by doing the same.

Not everyone is convinced that IFRS will improve financial reporting in the United States. For one, IFRS came into being in the early 1970s and is arguably less developed than US GAAP, which got its start in the 1930s. Further, adoption is expected by many to be more complex than the adoption of the Sarbanes-Oxley Act of 2002, which saw internal and external costs for corporate America rise exponentially, and will require an overhaul of the SOX 404 internal controls to ensure proper alignment of systems with IFRS accounting standards. Given that the US arguably has one of the most dynamic economies and easy access to capital, one must wonder if adoption of IFRS is truly necessary to remain competitive in a global economy.

Despite the potential for controversy and debate, it is becoming more and more apparent that an understanding of IFRS and what it might mean to US companies is imperative. Efforts should be underway now to develop the expertise because it is likely that the ramp up time will be significant. Also, users of a company’s financial statements (e.g., Board members, audit committees, investors, bankers, etc.) should begin developing an understanding of what IFRS could mean to financial reporting. There are many resources available, such as the AICPA’s “IFRS Primer for Audit Committees“, that will provide support. Of course, you should work with auditors that are well versed in IFRS to help support your own educational development.

If you haven’t heard of XBRL before, don’t worry, many others haven’t either. Unless you enjoy following the actions of the SEC and their worldwide counterparts, XBRL doesn’t exactly come up at your usual dinner party. However, if you’re responsible for financial reporting at a SEC registered company or are planning to register your company’s shares with the SEC, then you should be familiar with XBRL and it’s potential impact on your financial reporting processes.

For the uninitiated, XBRL is an acronym for eXtensible Business Reporting Language. XBRL is not a new technology, but is a standards-based way to communicate business and financial information. There are a number of resources on the web to help educate yourself and your staff on the topic, such as the AICPA’s XBRL site. Whether you’ve heard of XBRL or not, one thing is for sure: whether you’re the director of financial reporting, a corporate controller, or the CFO for your organization, what you need to know about XBRL is that it will require planning and forethought and will certainly involve change to your existing systems and financial close processes.

Currently, the SEC does not require registrants to submit filings in XBRL format, though they did issue a proposed rule [PDF] on May 30, 2008 and are currently soliciting public comments until August 1st. This proposal may soon change things for registrants and investors alike. For registrants, there are a number of ways to tackle the implementation of XBRL reporting; some may opt to outsource the effort to their financial printers, others may convert their data ‘manually’ with easy-to-use software tools for each reporting period, and others may implement software solutions directly into their general ledger or ERM packages. Regardless of how one gets there, it is apparent that it will involve support from your IT and financial experts, and will likely require Section 404 considerations relative to the internal controls within the organization.

It is worthwhile to note that most major financial markets are are moving in this direction, and XBRL is now mandated for financial filings in multiple jurisdictions worldwide. XBRL is moving ahead with or without us, and other US agencies such as the IRS and state taxing authorities are considering the merits of XBRL filings. Despite this, according to a June 2008 Compliance Week survey [subscription required] of 236 financial reporting executives, 55% have either just started researching XBRL or are not aware of the subject at all, and less than 20% of respondents have anybody on staff considered to be an XBRL expert.

The time is now to consider the effect of XBRL on your business and planning process. The short term effects of XBRL will likely be limited; just ask the early voluntary filers. However, it is clear from SEC speeches and proposals that XBRL is coming, and coming fast. Long-term benefits are likely to be realized by those businesses that are willing and able to embrace the technological change that XBRL will bring about, such as easier and faster access to competitive information and knowledge. If you haven’t already, I encourage you to learn more about XBRL and prepare for the forthcoming changes.