CFO Essentials - February 2012

February 2012

RISKSINTERNALCONTROLS

I.T.MANAGEMENT

FINANCIALREPORTING

TECHNICALACCOUNTING

REGULATORYREPORTING

M&A

TAX

RESOURCEMANAGEMENT

CASHFLOW

FINANCIAL REPORTING____________________________________________________________

Analysis of the Updated Exposure Draft on Revenue as it Relates to the Technology Industry

I.T. MANAGEMENT____________________________________________________________

Where Does My YouTube Video Come From?

TAX____________________________________________________________

Update on the California Enterprise Zone Program

Essential BriefingsFINAL RULES REGARDING THE NET WORTH STANDARD FOR ACCREDITED INVESTORS

Contents______________________________________________________________________________________________________________________________________________________

ESSENTIAL BRIEFINGS2 F INAL RULES REGARDING THE NE T WORTH STANDARD

FOR ACCREDITED INVESTORSThe Securities & Exchange Commission issued rules to implement Section 413(a) of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd–Frank Act) related to qualifications of high net worth investors in Final Rulemaking Release No. 33–9287, Net Worth Standard for Accredited Investors.

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FINANCIAL REPORTING3 ANALYSIS OF THE UPDATED E XPOSURE DR AF T ON RE VENUE

AS I T REL ATES TO THE TECHNOLOGY INDUSTRYThe FASB and IASB released and updated exposure draft in November 2011, which requires a five step approach with a goal to converge the revenue guidance for IFRS and US GAAP.

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I.T. MANAGEMENT5 WHERE DOES MY YOUTUBE V IDEO COME FROM?

If you haven’t see this video yet, you need to, just as almost 15 million others have. That’s right, this single video has been viewed almost 15 million times since June 2006 around the entire globe.

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TAX6 UPDATE ON THE CALIFORNIA ENTERPRISE ZONE PROGR AM

On October 10, 2011, Governor Brown resumed the process of completing the final California Enterprise Zone (“EZ”) designations for the eight conditional EZs that were established in 2010. Conditional Designation is a phase in the process of establishing an Enterprise Zone.

February 2012

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E S S E N T I A L B R I E F I N G S

FINAL RULES REGARDING THE NET WORTH STANDARD FOR ACCREDITED INVESTORSBY JIM PITRAT, CPA | PARTNERASSURANCE & [email protected] | 310.477.3924

The Securities & Exchange Commission issued rules to implement Section 413(a) of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd–Frank Act) related to qualifications of high net worth investors in Final Rule-making Release No. 33–9287, Net Worth Standard for Accred-

ited Investors.

The standards for qualifying as an “accredited investor” are used to determine if exemptions for private offerings from required disclosures about a sale of securi-ties. Offerings made only to ac-credited investors generally need not comply with the disclosure requirements called for by the

Securities Act, nor do they count toward the 35-purchaser limit of the limited offering exemption, and they are not required to meet the conditions of a sophisticated investor.

Rule 215 defines an accred-ited investor as a person whose individual net worth or joint net worth with that person’s spouse exceeds $1 million. Before Dodd–Frank Act the term “net worth.” It was commonly inter-preted to mean the difference between a person’s assets and li-abilities was not defined. Section 413(a) of the Dodd–Frank Act requires exclusion of the value of a principal residence for purposes of determining whether a person

qualifies as an accredited.

Rule 215, Accredited Investor, and Rule 501, Definitions and Terms Used in Regulation D.

Rules 215 and 501 have been amended as follows:• A primary residence is not

included as an asset.• Indebtedness secured by such

residence (limited to the resi-dence’s fair market value at the time of the sale of securities, is not included as a liability).

• Indebtedness secured by the primary residence in excess of the residence’s estimated fair market value is a liability.

These requirements do not apply to the calculation of net worth made in connection with a sale of securities pursuant to the right to purchase the securities if (1) such right was held by the individual on prior to enactment of the Dodd–Frank Act, the indi-vidual qualified as an accredited investor at the time the right was acquired, and the individual held other securities of the same issuer.

Rule 215 defines an accredited investor as a person whose individual net worth or joint net

worth with that person’s spouse exceeds $1 million

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ANALYSIS OF THE UPDATED EXPOSURE DRAFT ON REVENUE AS IT RELATES TOTHE TECHNOLOGY INDUSTRYBY SUZIE DORAN, CPA | PARTNERASSURANCE & [email protected] | 310.477.3924

E XECUT IVE SUMMARY

The FASB and IASB released and updated exposure draft in November 2011, which requires a five step approach with a goal to converge the revenue guidance for IFRS and US GAAP. The result is a new revenue recogni-

tion model that could signifi-cantly change the way entities recognize revenue by removing inconsistencies and improving comparability of revenue recog-nition. It employs an asset and

liability approach. The following is a summary of how this pro-posed standard may impact the technology industry from current US GAAP guidance.

SUMMARY OF ACCOUNT ING:

This draft proposes the following changes:

Elimination of software spe-cific guidance - Recognition will be based on distinct performance obligations met at a point in time with the ability to estimate a standalone selling price. This eliminates the need for VSOE and can result in earlier revenue recognition.

Intellectual Property Licenses - Revenue will be recognized when the customer gets control of the license rights. This removes cur-rent use of judgment in deter-mining if substance of agreement should be recognized upfront or ratably over the term of agree-ment and can result in earlier revenue recognition.

Variable Consideration - The transaction price is based on the estimated consideration, including uncertain or variable amounts using either a prob-ability or cash flow analysis. As current guidance requires a fixed and determinable price before recognition, this may result in earlier recognition.

Multiple Element Arrange-ments - Bundles of services and goods can be recognized as either a single or multiple performance obligations. This will result in more judgment in determin-ing the number of performance obligations in a bundle of services and goods.

Allocation of Transaction Price - This price can be allocated based on the relative standalone selling price, which can be estimated. The residual method can be used and certain elements such as discounts or change orders can be allocated to only one specific performance obliga-

A new revenue recognition model that

could significantly change the way entities recognize

revenue by removing inconsistencies and

improving comparability of revenue recognition

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F I N A N C I A L R E P O R T I N G

FINANCIAL REPORTING

tion. Easier revenue recognition on items not sold separately and more variability of judgment on allocation of pricing.

Consulting Services Contract - Revenue recognized when control of the good or service transfers to the customer. Judgment on if a performance obligation is satis-fied over time, but no significant change anticipated as current guidance is based on benefits received or if not obvious, a straight-line method.

Rights of Return - Liability accrued for expected refunds, which are updated based on changes. An asset and corre-sponding adjustment to COGs is recognized on the right to recover goods from customers on settling the refund liability. No material changes except that the BS will

be grossed up to include the re-fund obligation and the asset for the right to the returned goods.

Product Warranties - Separate performance obligations will be recorded for each warranty that the customer has the option to purchase separately. Extended warranties will be treated simi-larly as they will give rise to a separate performance obligation. Warranties that are separately

priced will be allocated on a rela-tive standalone price rather than the contractual price, resulting in differences in the amount of deferred revenue recognized for extended warranties.

Performance Obligations - Performance obligations settled over time will be analyzed to determine if they are deemed onerous. If they meet this crite-ria, a liability will be measured as the excess of the cost to settle the performance obligation over the amount of consideration allo-cated to that performance obliga-tion. Current onerous contracts are usually recognized under construction contract accounting. The proposed standard would broaden the impact of onerous contracts.

FOR FURTHER INFORMATION, PLE ASE CONTACT US:

GALE MOORE, CPA | ASSURANCE & ADVISORY PRACTICE LEADER [email protected] | 949.261.8600JIM PITRAT, CPA | PARTNER [email protected] | 310.477.3924SUZIE DORAN, CPA | PARTNER [email protected] | 310.477.3924

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An asset and corresponding adjustment to COGs is recognized on the right to recover goods from customers on settling

the refund liability

WHERE DOES MY YOUTUBE VIDEO COME FROM?

If you haven’t seen this video yet, you need to, just as almost 15 million others have. That’s right, this single video has been viewed almost 15 million times since June 2006 around the entire globe. If you think that’s impressive, today, YouTube serves more than 3 billion views per

day across its vast network of super computers with 60+ hours of video being uploaded to its servers every minute around the planet.

Now let’s talk about Cloud Computing. What does YouTube have to do with Cloud Comput-ing, business applications and services? Everything! YouTube

is a cloud-based video sharing service. YouTube is truly global with thousands of servers located in more than 40 countries being able to deliver its application and content on global demand.

Though this example of cloud computing is extreme, the tech-nology has paved the way over the last 6 years to allow the rest of us to utilize cloud computing in many different ways. Through SaaS, IaaS, PaaS and DaaS services (Software, infrastruc-ture, platform and desktop as a service), todays’ companies can take advantage of inherent and dynamic scalability, advanced business continuity planning and overall data and application serv-ing without the need to locally house or be responsible for large data centers of their own.

Mitigating the risk of intellectual property destruction, loss and even theft, is key to controlling your mobile task force. Remote access to data is something we have all used in some way, usual-ly from within our own corporate networking environments. The security risk by self-hosting your data can be detrimental in case of a systems failure, localized en-vironment catastrophe, or some other act of God that we have literally no control over. Putting your data and applications in an environment inherently capable of ‘staying up’ 24x7 allows you, the executive, to focus on busi-ness not your technology.

To learn more about how Cloud Computing can benefit your business, email us at [email protected] and one of our professionals will arrange a time to discuss your needs and desires.

What does YouTube have to do with Cloud Computing, business

applications and services? Everything! YouTube is

a cloud-based video sharing service

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I . T . M A N A G E M E N T

I.T. MANAGEMENT

UPDATE ON THE CALIFORNIA ENTERPRISE ZONE PROGRAMBY MARISOL CASEY | TAX [email protected] | 949.261.8600

On October 10, 2011, Governor Brown resumed the process of completing the final California Enterprise Zone (“EZ”) designa-tions for the eight conditional EZs that were established in 2010. Conditional Designa-tion is a phase in the process of establishing an Enterprise Zone.

During the Conditional Des-ignation phase, a business may generate incentives dependent on whether the EZ is a redesignated

zone or a brand new designation. Enterprise Zones which have been redesignated, and have been placed on conditional status may continue to afford zone incentives to businesses meeting the EZ requirements, during the period between the expiration date of the old zone and the final desig-nation of the new zone. Brand new zones, however, must await to receive their final designa-tions before any incentives can be generated.

The Department of Housing and Community Development (“HCD”) issued a memo estab-lishing a deadline of 180 days for all conditional zones to comply with the remaining requirements to obtain final designation. The deadline to comply is currently

set for April 10, 2012.

On January 10, 2012, the HCD awarded final designation to the Anaheim, Sequoia Valley (in Tulare County) and Sacramento Enterprise Zones.

•The Anaheim EZ will be ef-fective February 1, 2012. Its boundaries include nearly all of the City’s industrial and commercial areas and approxi-mately 80% of all Anaheim businesses. The Anaheim EZ designation will be effective for 15 years.

•The Sequoia Valley will be ef-fective retroactive to October 6, 2010 (based on AB 1550) will also be effective for 15 years. The Sequoia EZ includes the cities of Porterville, Lindsay, Exeter, Visalia, Tulare, Farm-ersville, Woodlake, Dinuba, Ducor, Earlimart, Goshen, Ivanhoe, Traver, North Delano, Pixley, Poplar, Richgrove, Terra Bella, Tipton and Strathmore.

•The Sacramento EZ includes the Cities of Sacramento, West

Conditional Designation is a phase in the process of establishing an Enterprise

Zone. During the Conditional Designation

phase, a business may generate incentives

dependent on whether the EZ is a redesignated

zone or a brand new designation

TA X

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TAX

Sacramento, Rancho Cordova and County of Sacramento.

Businesses operating within an EZ are eligible for substantial tax credits and benefits, such:

•Hiring Credits - Firms can earn $37,440 or more in state tax credits for each qualified newly hired employee to offset California state income tax liability

•Sales Tax Credit - Businesses can earn sales tax credits on purchases up to $20 million per year on qualified machin-ery and equipment to offset California state income tax liability

•Business Expense Deduction - Up-front expensing of certain depreciable property

•Net Operating Loss (“NOL”) - Up to 100% NOL carry-forward for 15 years

•Net Interest Deduction (“NID”) - Banks and other

lending institutions may receive a NID from California taxable income on the amount of “net interest” earned on loans made to zone businesses

Many local jurisdictions may also offer additional incentives, such as reduced public utilities (i.e., water and power) rates, that can increase the cost-effectiveness of

running your business in an EZ.

The following six remaining con-ditional zones have until April 10, 2012 to comply with their

terms of final designation:

1. Harbor Gateway Communi-ties (Cities of Los Angeles and Huntington Park, and County of Los Angeles)

2. Pittsburg (City of Pitts-burg and County of Contra Costa)

3. San Diego (Cities of San Di-ego, Chula Vista, and National City)

4. San Francisco (City and County of San Francisco)

5. Santa Clarita Valley (City of Santa Clarita and County of Los Angeles)

If you believe you are located within any of the Conditional EZs, listed above, and would like to learn more about the Califor-nia Enterprise Zone program, and how it can affect your busi-ness, please do not hesitate to contact our State and Local Tax professionals for assistance.

Many local jurisdictions may also offer additional

incentives, such as reduced public utilities (i.e., water

and power) rates, that can increase the cost-

effectiveness of running your business in an EZ

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W W W.SINGERLE WAK .COM | 877.754.4557

JIM PI TR AT [email protected] | 310.477.3924

GALE MOORE [email protected] | 949.261.8600

SUZIE DOR AN [email protected] | 310.477.3924

HARMEE T SINGH [email protected] | 310.477.3924

ELBERTA NIZ ZOLI [email protected] | 310.477.3924

STE VE LEE [email protected] | 949.261.8600

DAN HUNTER [email protected] | 408.294.3924

STE VE GRIMAUD [email protected] | 408.294.3924

DAVID KR A JANOWSKI [email protected] | 949.261.8600

SingerLewak is a leading regional accounting services firm in California with offices in Los Angeles, Orange County, Woodland Hills, Monterey Park, San Diego, Silicon Valley and San Francisco. Serving California since 1959, SingerLewak has established a reputation for excellence as professionals with unparalleled expertise in the Accounting and Management Consulting industry. Providing the services of a large firm with a blended environment of practices, industry specializations and particular attention to hands-on service, SingerLewak continues to demonstrate leadership and industry growth year-over-year. Our client relationship approach and industry excellence is renowned.

We are nationally recognized as active community and professional services partners, working among many sectors of the business world. Our core services deliver results whether it’s auditing, accounting, entrepreneurial business services, tax preparation, business manage-ment, SEC filings, transactions, enterprise risk manage-ment, forensic accounting, business valuation, litigation support, or consulting.

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CFO Essentials - February 2012

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