2014 Annual Accounting Update for Private Enterprises
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Annual Update for Private Enterprises Welcome to the Welch LLP 2014 Private Enterprise Update Seminar
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Transcript of 2014 Annual Accounting Update for Private Enterprises
Annual Update for Private Enterprises
Welcome to the
Welch LLP 2014
Private Enterprise
Update Seminar
Agenda
• ASPE Updates
• IFRS & U.S. Updates
• SR/ED Recent Developments
• EDC Exporting Solutions
• Audience Q&A
• BREAK
• Tax Update / Impact on Tax Strategies
• How to Prevent Fraud
• Audience Q&A
Shawn Kelso, CPA, CAPartner, Director of Professional Standards
www.welchllp.com
@WelchLLP
ASPE Updates
Changes to ASPE
• New standards
o 3462 Employee Future Benefits
o 1591 Subsidiaries
o 3056 Interests in Joint Arrangements
• Revised Standards
o 3475 - Discontinued Operations
o Improvements to ASPE
3462 - Employee Future Benefits
• Applies to periods beginning on or after January 1, 2014 (early
adoption permitted)
• Replaces Section 3461
• Summary of changes impacting defined benefit plans
o Deferral and amortization method no longer permitted
Defined benefit liability (asset)
= fair value of obligation
- fair value of plan assets
Measurement of assets and obligations must be at the
balance sheet date
1591 - Subsidiaries
• Applies to periods beginning on or after
January 1, 2016 (early adoption permitted)
• Replaces Section 1590 and AcG 15 on VIEs
• Provides for new guidance when control
exists by other than equity interest
o *Entities under common control not in
scope
3056 Joint Arrangements
• Applies to periods beginning on or after January 1, 2016 (early
adoption permitted)
• Replaces Section 3055 Joint Ventures
• Summary of changes
o Specifies 3 types of arrangements
Jointly controlled operations, assets, enterprises
• Recognition of interest in JV now depends on classification
o Proportionate consolidation no longer permitted
• New requirements for recording gains/losses on contributions to
JVs
Recognition of Interest in Joint Arrangements
Jointly Controlled
Operations
Jointly Controlled
Assets
Jointly Controlled
Enterprises
Responsible for their
own assets &
liabilities
Revenue & expenses
recorded in
accordance with
agreement terms
Record its share of
jointly controlled
assets & liabilities
Revenue & expenses
recorded in
accordance with
agreement terms
Equity
Cost or
Account for as a joint
operation or joint
asset (if underlying
agreement terms
provide for such
rights)
3475 - Discontinued Operations
• Applies to periods beginning on or after January 1, 2014 (early
adoption permitted)
• Summary of changes:
o Change to the qualifying criteria for discontinued operations
Separate major line of business or geographic area
Single co-ordinated plan to sell
2013 Annual Improvements
• Apply to periods beginning on or after January 1, 2014
(early adoption permitted)
o Business combinations –
contingent consideration
Disclosures when cost or equity used for subsidiaries
o Accounting for Changes in Ownership (subsidiaries and JVs)
o Non-controlling interest should not be a deduction on income
statement
o Financial instruments
Redemption by virtue of economic compulsion
Additional guidance on anticipated transaction
hedged by forward contract
Exposure Draft – Redeemable Preferred Shares Issued in a Tax Planning Arrangement
• Proposes changes to redeemable preferred shares issued in tax planning
arrangement
o Account for liability (consistent with other redeemable preferred
shares)
o Corresponding debit would be a separate component of equity
o Reclassify other equity component to retained earnings as shares are
redeemed
• Proposed change would be effective for years beginning on or after
January 1, 2016
IFRS & U.S. Updates
Ken Brownlee, CPA, CASenior Manager
www.welchllp.com
@WelchLLP
International Financial Reporting Standards (“IFRS”)
• Revised standards
o IFRS 9, Financial Instruments
• New standards
o IFRS 14, Regulatory Deferral
Accounts
o IFRS 15, Revenue from
Contracts with Customers
• Projects in progress
IFRS 9 – Financial instruments
• Effective January 1, 2018
o Early adoption available
o Options on adoption
Delay
Entirety
In part
• Recent changes
o Hedge accounting
o Impairment of financial assets
o Classification & measurement
IFRS 14 – Rate regulated
• Deferral ends January 1, 2015
• Interim guidance for entities with rate regulated activities
(Utilities, Pipelines, etc.)
• Comprehensive project – interim guidance
IFRS 14 – Rate regulated
• How is rate regulated?
o Conduct rate regulated activities
o Recognize qualifying regulatory deferral account balances
• Who qualifies?
o First time adopters only
o Apply IFRS 1 for all other financial statement line items
• Recognition and measurement of regulatory accounts
IFRS 15 – Revenue recognition
• Current status
o New standard
o Issued by IASB in May 2014, joint standard with FASB
o Expected to be finalized in Q4 2014
o Effective January 1, 2017
o Early adoption
IFRS 15 – Revenue recognition
• State of the nation
o FASB complexity and volume
o IFRS so many standards
IAS 11
IAS 18
IFRIC 4
IFRIC 15
IFRIC 13
IFRIC 18
IFRS 15 – Revenue recognition
• Framework
o Recognition of revenue for consideration expected in
exchange for promised goods or services
o Principles based framework
IFRS 15 – Revenue recognition
• Transition options
o Retrospective
Full
Optional practical expedients
o Modified
New contracts and contracts in process
IFRS 15 – Revenue recognition
• 5 steps
1. Identify contract with customer
2. Identify performance obligations
3. Determine transaction price
4. Allocate transaction price to
performance obligations
5. Recognize revenue when
performance obligation satisfied
• Current approach
o Risks & rewards
IFRS 15 – Revenue recognition
• Implementation considerations
• Key changes
• Impact on stakeholders
United States GAAP
• Convergence with IFRS
o Revenue
o Leases
o Financial instruments
• Private company GAAP
• Other changes
o Discontinued operations
o Going concern
o Disclosure framework
SR/ED – Recent Developments
Terry LavinewayDirector of Business Incentives
www.welchllp.com
@terryl99
SR&ED – Recent Developments
• Changes introduced in 2012 are
in full effect
o Proxy amount now at 55% for
2014 (60% for 2013)
o Subcontractors now at 80%
of eligible expenditure
o Capital expenditures no
longer eligible beginning
January 1, 2014
SR&ED – Recent Developments
• Administrative changes at the CRA SR&ED directorate
o Ottawa team reports to Assistant Director in Toronto Centre
o Claim Revenue Manual revision coming
o Some sector-specific guidance being reintroduced
o More training for reviewers
o Mandatory communication on eligibility decision prior to an
assessment being released
o No more generic RFI’s
SR&ED – Recent Developments
• Continuing to see interesting audit issues
o Supporting evidence issues – financial and science
o Routine Development
o Proof of concept = end of SR&ED
• Still seeing stranger audits outside of Ottawa … but it’s
creeping in
Introduction to EDC Solutions
Melanie CarterAccount Manager - EDC
www.edc.ca
@ExportDevCanada
Jennifer Ewin, MBAAccount Manager - EDC
www.edc.ca
@ExportDevCanada
October 2014
Introduction to EDC Solutions
Welch Clients
for
Recognized EDC Solution Advisor
› Canada’s Export Credit Agency
› Crown corporation wholly owned by
Government of Canada
› Financially self-sustaining
› Operates on commercial principles
› Supports direct and indirect exporters
ABOUT EDC
› Facilitated $95.4 billion in business carried out by Canadian companies
› Served about 7,100 customers
› Supported business in 198 countries
› Facilitated $27.3 billion in emerging markets
› Contributed to 4% of GDP, supporting 568,799 jobs
2013 PERFORMANCE HIGHLIGHTS
33
Sales Managers - Increase Sales
› Be more competitive getting contracts:
› Offer more attractive payment terms:
› Open terms – no payment up front,
› For example – 60, 90, 120 days… etc.
› Offer advance payment guarantees
› Issue bid bonds
› Bid on larger contracts even with up front working capital costs
› Potential to offer international buyer financing through EDC
› Increase credibility to foreign prospects:
› Able to issue performance bonds
› Backed by AAA rated, Canadian government organization
› Sell into new markets with confidence
HOW EDC CAN HELP
HOW EDC CAN HELP
Finance Managers - Improve Cash Flow
› Increase Working Capital
› Obtain financing on one or multiple export contracts
› Eliminate collateral for Standby LCs or Bonds
› Get better credit terms with suppliers by offering them guarantees
› On SRED
› Increase Operating Lines:
› Include 90 % of foreign & domestic receivables
› Borrow against your inventory outside of Canada
› Get Financing
› With our loan guarantees, to acquire foreign assets or firms
› To obtain or increase a line of credit
Risk Managers - Reduce Risk
› Peace of mind that you will be paid on international
contracts
› Protect your foreign assets from political risk
› Protect your balance sheet
› Protect yourself from both contract and cancellation risk
› Protect your down-payment when purchasing capital
equipment
HOW EDC CAN HELP
REACHING OUT
One Question:
Are you exporting – directly or indirectly – or
close to having an export contract?
If the answer is yes … please reach out!
Contact WelchGroup Consulting
• Candace Enman
• 613.236.9191 ext.195
Have questions so far?
Ask us now!
Audience Q&A
We will now have a 15 minute break.
Thank You.
Break
Tax Update / Impact on Tax Strategies
Don Scott, FCPA, CATax Partner, Director of Tax Services
www.welchllp.com
@WelchLLP
Federal & Ontario Budgets –Corporate Tax Measures
• Corporate Tax Rates
• No Changes
• When Ontario Budget Balanced?
• Ontario Small Business Deduction
• Clawback when capital > 10M (Similar to FED rule)
2014 General M&P
Small
Business
Investment
Income
Federal 15.0% 15.0% 11.0% 34.7%
Ontario 11.5% 10.0% 4.5% 11.5%
Combined 26.5% 25.0% 15.5% 46.2%
Combined Federal and Provincial Corporate Tax Rates for 2014
Active IncomeManufacturing
Income
Small Business
< $500,000InvestmentIncome (9)
Federal 15.00% 15.00% 11.00% 34.67%ProvinceNewfoundland (1) 29.00% 20.00% 14.50% 48.67%Nova Scotia (2) 31.00% 31.00% 14.00%/27.00% 50.67%Prince Edward Island 31.00% 31.00% 15.50% 50.67%New Brunswick 27.00% 27.00% 15.50% 46.67%Quebec (3) 26.90% 26.90% 19.00% 46.57%Ontario (4) 26.50% 25.00% 15.50% 46.17%Manitoba (5) 27.00% 27.00% 11.00%/23.00% 46.67%Saskatchewan (6) 27.00% 25.00% 13.00% 46.67%Alberta 25.00% 25.00% 14.00% 44.67%British Columbia 26.00% 26.00% 13.50% 45.67%Yukon (7,8) 30.00% 17.50% 13.00%/14.50% 49.67%Nunavut 27.00% 27.00% 15.00% 46.67%Northwest Territories 26.50% 26.50% 15.00% 46.17%
Corporate Income Tax –2014 Federal Budget Measures
• Eligible Capital Property Consultations
o Replace ECP Regime with CCA Framework
o Old – 75% Add / 7% AMORT
o New – 100% Add / 5% CCA
o Transitional Rules
o Tax Implications for Asset Sale Transactions
ECP Consultations –Compare Old vs. New
ECP CAP Gain
Proceeds (no
cost)
1,000,000 1,000,000
Addition to CDA 500,000 500,000
Initial Corp. Tax
Small Business 75,000 225,000
Big Business 125,000 225,000
Combined Corp
& Personal Tax
250,000 250,000
Sell Shares /
CAP Gain
250,000 250,000
• Lose tax deferral on asset sale
Ontario Budget – Other Matters
• Ontario Retirement Pension Plan
o 3.8% / $90K Earnings
o 50/50 Employer/Employee
o “Comparable” Workplace Plan
o Start 2017
• Other Matters Under Study
o SR/ED Credit Incremental increase
o ATTC / CETC not refundable for big businesses
Federal & Ontario Budgets –Personal Income Tax
• Personal Tax Rates
o Federal – no changes
o Ontario –
New Intermediate Tax Bracket - $150K
Lower Income Threshold for Top Tax Bracket - $220K (from $514K)
No Inflation Adjustment
• Top Marginal Rates for 2014:
• Dividend Tax Credit & Surtax Calculations
• Federal – Increase tax on non-eligible dividends
• Ontario – Now after 56% Surtax
– Adjust for Eligible Dividends
Type of Income
Over
$220,000
$150,000
-
$220,000
$136,270
-
$150,000
Eligible Dividends 33.82% 31.67% 29.52%
Non-eligible
Dividends40.13% 38.29%
36.45%
Capital Gains 24.76% 23.98% 23.20%
Other Income 49.53% 47.97% 46.41%
Combined Federal & Provincial Top Marginal Tax Rates for 2014
Province
Salary and
Interest
Capital
Gains
Non-eligible
Dividends (1)
Eligible
Dividends
Newfoundland (2) 42.30% 21.15% 31.01/32.08% 22.47/30.19%
Nova Scotia (3) 46.5/50.00% 23.25/25.00% 34.94/39.07% 31.23/36.06%
Prince Edward Island 47.37% 23.69% 38.74% 28.7%
New Brunswick 46.84% 23.42% 36.02% 27.35%
Quebec 49.97% 24.99% 39.78% 35.22%
Ontario 46.41% 23.21% 36.45% 29.52%
Ontario (4) 47.97/49.53% 23.98/24.77% 38.29/40.13% 31.67/33.82%
Manitoba 46.4% 23.2% 40.77% 32.26%
Saskatchewan 44.0% 22.0% 34.91% 24.81%
Alberta 39.0% 19.5% 29.36% 19.29%
British Columbia (3) 43.7/45.8% 21.85/22.9% 35.51/37.99% 25.78/28.68%
Yukon (6) 42.4% 21.2% 32.04% 15.93 to 19.29%
Nunavut 40.5% 20.25% 31.19% 27.56%
Northwest Territories 43.05% 21.53% 30.72% 22.81%
This schedule reflects information concerning Federal and Provincial tax rates
known as of July 14, 2014.
Federal & Ontario Personal Tax Rates by Tax Bracket
Taxable Income Ordinary Eligible Dividend
Non-eligible Dividend
Capital Gain
Lower Upper
11,138 40,120 20.05% 0.00% 5.35% 10.03%
40,121 43,953 24.15% 0.00% 10.19% 12.08%
43,954 70,648 31.15% 9.63% 18.45% 15.58%
70,649 80,242 32.98% 10.99% 20.61% 16.49%
80,243 83,236 35.39% 14.31% 23.45% 17.70%
83,237 87,907 39.41% 19.86% 28.19% 19.70%
87,908 136,270 43.41% 25.38% 32.91% 21.70%
136,271 150,000 46.41% 29.52% 36.45% 23.20%
150,001 220,000 47.97% 31.67% 38.29% 23.98%
220,001 ∞ 49.53% 33.82% 40.13% 24.76%
Integration
Small Business Big Business Investment
CORPORATION
Income $1000 $1000 $1000
Tax (155) (265) (462)
845 735 538
RDTOH 267
845 735 805
PERSONAL
Tax as Dividend (339) (249) (323)
Net $ 506 $ 486 $ 482
Tax Overall $ 494 $ 514 $ 518
Tax as Individual $ 495 $ 495 $ 495
Impact on Remuneration Strategies
• Bonus down to Small Business Limit
o Not automatic anymore
o Tax Deferral
o Eligible Dividends / No Big Tax Cost
o Cashflow of Shareholders / RRSP / CPP
o Income Splitting / Family trust
• Build up of Retained Earnings / Value
o Creditor Proofing
o Impact on CGE
Impact on Remuneration Strategies
• Pay Dividends to get RDTOH
o Not Automatic anymore
o Dividend Tax rate higher than refund rate
o Break even if GRIP
o Income Splitting / Family Trust
• Capital Gain vs. Dividend
o Less tax on capital gain compared to dividend
o “Pipeline” Transaction
o Capital Gains / Family Trusts
Impact on Remuneration Strategies
• Consider Non-CCPC to earn investment income
o No RDTOH System
o Taxed similar to big business income
o Tax Deferral
Impact on Exit Strategies
• Increases Value at Corporate Level
o No more “Bonus”
o Higher capital gain on exit
• Small Business Capital Gain Exemption
o May no longer qualify
o Need to “Purify”
o Trust sandwich
o Butterfly transaction
Impact on Exit Strategies
• Sell Shares or Assets
o Sell shares to get SBCGE
o Sell assets if goodwill
Tax deferral on ECP
Not if new rules
o S.84.1 Planning
• Capital Gain Better in Company
o Tax deferral
o Consider TRF to company prior to sale
Impact on Exit Strategies
• Exit Due to Death
o Capital gain cheaper than dividend
o S.164(6) Planning
o “Pipeline” Strategy
o Life Insurance Strategies
How to Prevent Fraud
Andre Auger, CGA, CFEGovernment Services Advisor
www.welchllp.com
@WelchLLP
• Definition of Fraud
• Some Statistics
• Occupational Fraud
• Warning Signs
• What to do if You Find Fraud
• Penalties & Offences
• Assessing Susceptibility
• Prevention Measures
• Fraud Risk Assessments
Agenda
• Financial fraud is defined as one
or more intentional acts to deceive
other persons and cause them
financial loss.
• Involves a violation of trust
• The violation of trust is sometimes
more harmful than the actual
financial loss
• Fraud Triangle
• Internal fraud = Occupational fraud
• External fraud = mortgage fraud,
insurance fraud, bankruptcy fraud,
money laundering, tax fraud
Definition of Fraud
• The typical business loses 5% of its
revenues to fraud each year
• The avg. loss for small businesses is $140K.
• Occupational fraud is the biggest threat to
small businesses (asset misappropriation,
corruption, F/S fraud)
Some Statistics – CFE Survey
• Financial statement schemes
o improper revenue recognition, inadequate disclosure of
related party transactions, improper asset valuations,
fictitious fixed assets, improper capitalization, improper
deferral of expenses
• Employee schemes
o expense abuse, theft, fictitious documents, forgery
• Bribery and Corruption
o conflict of interest, bid rigging, kickbacks, economic
extortion
Occupational Fraud
• Personal characteristics of a fraudster
o intelligent, inquisitive, egotistical,
risk taker, rule breaker
• Behavioural red flags
o living beyond means, big spender,
keeps unusual work hours, financial
difficulties
• Other signs
o cash flow issues despite regular
sales’ activity
o decreasing profit margins despite
normal market activity
o significant drop in inventories
Warning Signs
• ‘Tone at the Top’ is critical; adopt the
zero tolerance approach
• Seek advice from your legal counsel
• Contact your local police force for
guidance and advice
• If employees are involved, consider
termination of employment
• Pursue recovery strategies; negotiate
repayment agreements
• Press charges
• Proceed methodically, do not
jeopardize a potential investigation
What to do if You Find Fraud
• Applicable sections under the Criminal Code
121 ‘Frauds against the Government’
122 ‘Breach of Trust’
322 ‘Theft’
380 ‘Fraud’
397 ‘Books and Documents’
• Section 380: where the offence > $5,000, a term of imprisonment
not exceeding 14 years; if the offence is
< $5,000, a term of imprisonment not exceeding 2 years
• Section 397: falsifying documents, term of
imprisonment not exceeding 5 years
Penalties & Offences
• What sector do you operate in? Are
you in a high risk sector?
• What controls do you have in
place; are they reasonable &
practical for your organization
• Stay away from costly and
resource consuming controls
• Is your staff experienced & loyal?
• Emphasize prevention
Assessing Susceptibility
• Be visible, let people know you are
watching the money; sign cheques, ask for
original documents, ask questions
• Show up on site unexpectedly
• Let people know you are looking for fraud
• Never sign stacks of blank cheques
• Do your homework before hiring
employees; background checks,
references, etc…
• Have employment contracts in place with
clear sections dealing with fraud and
consequences
Prevention Measures
• Check the monthly bank
statements
• Review your F/S regularly,
compare to previous periods
• If you are a small
organization, consider hiring
an external accountant for a
few hours per month to do
your bookkeeping and review
your records
Prevention Measures
• Helps you identify risks and gaps in your organization’s controls
• Focus is on deterrence
• Not a complicated, costly exercise
• Assesses the risks associated with employees and management
• Assesses the risks associated with outside parties dealing with
your organization (vendors, customers, banks, etc…)
• Assesses the likelihood of cash schemes, purchasing schemes,
contracting schemes, payroll schemes, theft of inventory,
conflicts of interest, etc…
• Looks at the physical controls in place
to deter fraud
Fraud Risk Assessments
Have questions?
Ask us now!
Audience Q&A
All event registrants will receive a
digital copy of the presentation via e-mail.
Event recording & slide content also available soon at
www.welchllp.com
Thank you.
