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BDO Comment Letter - ​Technical Corrections and Improvements to Recently Issued Standards - Part I

Tue, 11/14/2017 - 12:00am
Technical Corrections and Improvements to Recently Issued Standards - Part I: Accounting Standards Update No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities; Part II: Accounting Standards Update No. 2016-02, Leases (Topic 842) (File Reference No. 2017-310)

BDO generally supports the FASB's proposed improvements to the recently issued standards on recognition and measurement of financial assets and liabilities (ASU 2016-01) and leases (ASU 2016-02).  We believe that the proposal, together with our recommendations, would improve the standards.

SEC Approves the New PCAOB Auditor Reporting Model

Thu, 11/02/2017 - 12:00am
The SEC has approved the PCAOB’s final auditor reporting standard which will have staggered implementation that effects audits for fiscal years ending on or after December 15, 2017.  While the pass/fail opinion has been retained, several significant changes to both format and required disclosures will necessitate increased attention by audit committees and management along with their auditors during the coming audit cycles.

What’s Changing?
On October 23, 2017 the SEC) approved the PCAOB’s new auditor reporting standard, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, as adopted by the PCAOB in June 2017. The SEC also approved related amendments to certain other PCAOB standards.
As noted in BDO’s prior Alert, the new standard and related amendments, which will replace portions of AS 3101, Reports on Audited Financial Statements, retain the pass/fail opinion in the existing auditor’s report, but significantly change the existing auditor’s report to include a discussion of “critical audit matters” (CAMs) that have been communicated to the audit committee, particularly those that involve especially challenging, subjective or complex auditor judgment. The new standard also requires disclosure of the auditor’s tenure (i.e., the year in which the auditor began serving consecutively as the company’s auditor) within the auditor’s report, and requires other formatting changes to the auditor’s report.

Which Audits Are Impacted and When?
The standard and amendments generally apply to audits conducted under PCAOB standards; however, communication of CAMs is not required for audits of emerging growth companies; brokers and dealers; investment companies other than business development companies; and employee stock purchase, savings, and similar plans. Auditors of these entities may choose to voluntarily include CAMs in the audit report.
The final standard and amendments will take effect as follows:
  New Auditor Reporting Provisions Effective Date Report format, tenure, and other information Audits for fiscal years ending on or after December 15, 2017 Communication of CAMs for audits of large accelerated filers Audits for fiscal years ending on or after June 30, 2019 Communication of CAMs for audits of all other companies Audits for fiscal years ending on or after December 15, 2020  
The PCAOB plans to do a post-implementation review of the new standard to make sure it is working as intended and does not lead to any unintended consequences. Consistent with the views set out in BDO’s comment letter to the SEC, the SEC Chairman Jay Clayton emphasized that, “The phased effective dates for CAMs should facilitate some early-stage analysis through the PCAOB’s Post-Implementation Review process, based on the experiences of large accelerated filers. Depending on the findings of this analysis, including an evaluation of unintended consequences, the board should be open to making changes, if necessary, to the revised auditing standards, including to the effective date for companies other than large accelerated filers.”

Where to Learn More?
The new standard and amendments have not yet been posted to the Auditing Standards section of the PCAOB website, but can currently be found at https://pcaobus.org/Rulemaking/Docket034/2017-001-auditors-report-final-rule.pdf (see page A1-1 for AS 3101).

BDO will be providing updated guidance to our clients and contacts on evolving developments with respect to the new auditor’s reporting model in the form of thought leadership, infographics, examples, and educational opportunities through our Center for Corporate Governance and Financial Reporting.
We encourage audit committees and management to be engaging in robust dialogue about the changes required by AS 3101 and how this will impact current and subsequent years’ audits.
For more information, please contact one of the following practice leaders: 
  Jan Herringer
National Assurance Partner Amy Rojik
National Assurance Partner

BDO Comment Letter - Exposure Draft: Not-for-Profit Entities (Topic 958)

Tue, 10/31/2017 - 12:00am
Exposure Draft: Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made (File Reference No. 2017-270)

BDO supports the proposed enhancements to account for non-profit contributions.


Special Edition of EBP Commentator - 2017 COLA Update

Thu, 10/26/2017 - 12:00am
The Internal Revenue Service has announced the cost-of-living adjustment (COLA) for 2018. The dollar limitations for pension plans and selected other items are included in this Special Edition of the EBP Commentator. Certain annual compensation amounts were increased, including the limit for elective deferrals, which have not been updated since 2015. The Social Security Administration separately announced an increase to the taxable wage base.
  View the Newsletter

BDO Comment Letter - Land Easement Practical Expedient for Transition to Topic 842 (File Reference No. 2017-290)

Tue, 10/24/2017 - 12:00am
BDO supports the FASB's proposed transition practical expedient in ASC 842 related to easements which have not previously been assessed under ASC 840 as leases.  While we acknowledge that the proposal will not resolve the diversity in current practice, we believe this guidance is a practical and reasonable approach to reducing some of the cost and complexity of adopting ASC 842.

SEC Proposes Amendments to Regulation S-K

Wed, 10/18/2017 - 12:00am
Summary On October 11th, the SEC proposed amendments to modernize and simplify certain disclosure requirements in Regulation S-K. The proposal would not make major changes to Regulation S-K. Rather, in Commissioner Piwowar’s words, the proposed amendments respond to the SEC’s mandate under the Fixing America’s Surface Transportation Act to “prune the regulatory orchard” – i.e., clear away the unnecessary or inconsequential to allow enhanced focus and attention on what is material to a filing.  The amendments are based primarily on recommendations made in the staff’s November 2016 Report on Modernization and Simplification of Regulation S-K and are intended to update or streamline the disclosure framework while still providing investors with all material information required to make informed decisions.
  Details Among other things, the proposed amendments would revise:
  • S-K Item 303, Management’s Discussion and Analysis, to emphasize that the registrant focus its discussion of comparative periods on changes that are material to its financial condition and operations. The proposed amendments emphasize concepts in the SEC’s 2003 MD&A Interpretive Release, which encourages registrants to take a “fresh look” at previous periods.  The proposal would permit registrants to omit the discussion of the earliest period presented if it is no longer material or of continuing relevance to an investor.
  • S-K Item 102, Description of Property, to replace references to “major” encumbrances and “materially important” physical properties with a materiality threshold. The proposal would require a description of property only if it is material to the registrant or its business. However, the proposed amendments would not apply to registrants in the mining, real estate, and oil and gas industries.
  • S-K Item 601, Exhibits, to permit registrants to redact confidential information from material contracts without first submitting a confidential treatment request to the SEC staff where such information is both not material and competitively harmful if publicly disclosed. 
The proposal would also make changes to use technology to improve access to information.
Comments on the proposal are due within 60 days of being published within the Federal Register.
For questions related to matters discussed above, please contact:
  Jeff Jamarillo
National Partner of SEC Services Practice Paula Hamric
National Assurance Partner

Topic 606, Revenue From Contracts With Customers - Exploring Transition Methods

Tue, 10/17/2017 - 12:00am
ASU 2014-09, Revenue from Contracts with Customers (Topic 606), comes into effect for public business entities (PBE) for annual reporting periods beginning after December 15, 2017, including interim periods within that year. Therefore, a calendar year-end public entity will reflect the new standard in its first quarter ending March 31, 2018, each subsequent quarter, and also in the year ending December 31, 2018. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year.
  View the Newsletter

Topic 606, Revenue From Contracts With Customers - Presentation And Disclosure

Tue, 10/17/2017 - 12:00am
In 2014, the Financial Accounting Standards Board (FASB) issued its landmark standard, Revenue from Contracts with Customers. 1 It is generally converged with equivalent new IFRS guidance and sets out a single and comprehensive framework for revenue recognition. It takes effect in 2018 for public companies and in 2019 for all other companies, and addresses virtually all industries in U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. For many entities, the timing and pattern of revenue recognition will change. In some areas, the changes will be very significant and will require careful planning.
  View the Newsletter

Initial Offerings Newsletter - Fall 2017

Wed, 10/11/2017 - 12:00am

Download PDF Version

Flurry of IPOs to Close Q3 Bodes Well for Strong Q4
Offerings, Proceeds and Filings Have Already Surpassed 2016 Totals While the broader U.S. stock market has been a pillar of stability in 2017, consistently climbing upward with little volatility, the U.S. market for initial public offerings (IPOs) has resembled a rollercoaster ride.  IPO activity started the year off at a crawl, before a frenzy of offerings priced in the Spring.  That was followed by a very slow Summer, prior to a flurry of activity in late September as the calendar turned to Fall.

Despite the bumpy ride, the U.S. IPO market has rebounded well from a very disappointing year in 2016, as offering activity, proceeds and filings have each already surpassed last year’s full year totals.

Through September, there have been 106 IPOs that have raised $24.6 billion in proceeds on U.S. exchanges in 2017, representing increases of 41 percent and 107 percent respectively from Q3 totals of 2016.  The 141 offering filings through the first nine months of the year also reflect a sizable (+41%) jump from a year ago.  Through Q3, U.S. IPOs have averaged $232 million in size, more than 46 percent larger than a year ago.* 

“When you consider the divisive politics in Washington, daily threats of nuclear war from North Korea and multiple natural disasters impacting various regions of the country, the strong performance of the U.S. stock market has been extremely impressive,” said Christopher Tower, Partner in the Capital Markets Practice of BDO USA. “Given that resiliency and the jump in offerings during the second half of September, there is every reason to believe that IPO activity can gain momentum in Q4 and complete a strong rebound from a difficult 2016.” 

*Heavily impacted by $17.9 billion VISA IPO
Renaissance Capital, Greenwich, CT (www.renaissancecapital.com)


Source: Renaissance Capital, Greenwich, CT (www.renaissancecapital.com)


For the fifth consecutive year, the healthcare sector – with 32 IPOs - is leading all industries in the number of offerings brought to market.  Biotech IPOs have been the key driver in healthcare and they should continue to propel offering activity moving forward.

The technology industry has the second most IPOs through Q3, but those 19 offerings are far below expectations.  Many had hoped that 2017 was going to be the year that many of the tech “unicorns” (private companies valued at more than $1 billion) would leave their private stables for the open range of the public markets, but only a few made the trip. 

Given the poor performance of the Snap and Blue Apron IPOs, each still trading below their offering price, there is renewed doubt about the valuations of these private Silicon Valley businesses, leading to a continued resistance to testing the public waters.

The financial (13), energy (13) and industrial (10) sectors are also strong contributors to this year’s IPO rebound.  No other industry has reached double digits in offerings this year.


“For some time now, IPO market observers have been waiting for the technology sector to spring to life and assume its traditional place as the U.S. IPO leader. Unfortunately, every time activity begins to pick up, some poor debuts, most recently by Snap and Blue Apron, have caused other potential tech IPOs to postpone their offering plans,” said Lee Duran, Partner in the Private Equity Practice of BDO USA. “However, there have been successful technology offerings this year. Seattle-based, Redfin, the online real estate company, had a successful launch in late July and it continues to trade well above its offering price. More recently, Roku, the television streaming service, surged 90 percent on its initial two days of trading at the close of Q3. This type of performance is exactly what is needed to entice more of the Silicon Valley set to join the public markets.” 


Q4 Forecast

As we enter the final quarter of 2017, the U.S. IPO market is heating up again.  U.S. stock markets remain near all-time highs with very little volatility, making for an attractive market for new offerings.  With filing activity picking up and a suspected strong backlog of confidential filers, the rebound that began last Spring looks to be starting up again as we enter Q4.

Positive market conditions that have been present throughout the year and the strong performance of offerings overall - the average IPO has delivered better than 20 percent return in 2017 - is likely to drive additional pricings through year-end.

The 2017 BDO IPO Outlook survey of leading investment bankers, released last January, predicted approximately 120 IPOs averaging $235 million in size on U.S. exchanges in 2017, which projected to more than $28 billion in proceeds.  If the IPO market merely maintains its year-to-date performance through Q4, the Outlook’s forecast will be comfortably exceeded.

“Although the SEC’s decision to extend the JOBS Act’s confidential filing provision to all offering companies was a welcome move that should encourage more offerings, it also greatly reduces the visibility of the IPO pipeline,” said Jeff Jaramillo, SEC Practice Leader at BDO USA. “However, with 50 public filings in Q3 as a baseline, it is safe to assume that there is a healthy quantity of potential offering companies ready to move forward should the environment continue to remain favorable for IPOs.” 


For more information on BDO’s Capital Markets services, please contact one of the regional leaders:
  Jeff Jaramillo
Washington, D.C.   Christopher Tower
Orange County   Lee Duran
San Diego   Ted Vaughan
Dallas   Paula Hamric

FASB Flash Report - October 2017

Wed, 10/11/2017 - 12:00am
Accounting Guidance Related to Natural Disasters
Table of Contents  
Summary In the aftermath of recent natural disasters including Hurricanes Harvey, Irma, and Maria, as well as earthquakes in Mexico, this FASB Flash Report is intended as a resource for the related financial reporting issues. These matters may impact third quarter interim reports for SEC registrants. The accounting guidance differs by the type of loss, but practitioners should bear in mind that the losses are generally reflected in the accounting period of the natural disaster, independent of any potential insurance proceeds, which are accounted for separately.
  Details Asset Impairment and Contingent Losses
As a result of natural disasters many assets may be destroyed, damaged or impaired. When considering if impairment exists, an entity should first determine the condition of the asset. If an asset is destroyed, it should be written off as an expense. Otherwise, an impairment may be required.
  • Receivables and Loans - Receivables and loans from entities impacted by natural disasters might be at risk for collectability. Receivables and loans are subject to ASC 310 and ASC 450-20.  A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Loan impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except as a practical expedient, impairment can be measured based on a loan’s observable market price or the fair value of the underlying collateral.
  • Inventory - Under ASC 330-10-35, inventory measured using any method other than LIFO or the retail inventory method is carried at the lower of cost or net realizable value. When the net realizable value of inventory is lower than its cost, the inventory should be written down and recognized as a loss in earnings in the period in which it occurs. For inventory measured using LIFO or the retail method, an adjustment is required when the utility of the goods is no longer as great as their cost. Where there is evidence that the utility of goods will be less than cost, the difference is recognized as a loss of the current period.
  • Indefinite-lived Intangible Assets - Indefinite-lived intangible assets are addressed under ASC 350-30-35.  They are tested for impairment annually, or more frequently if events or circumstances indicate the asset might be impaired, by comparing the fair value of the assets to their carrying amount. Alternatively, an entity may first perform a qualitative assessment to determine whether it is necessary to perform the quantitative assessment described in ASC 350-30-35-19. Note, an indefinite-lived intangible asset is initially tested for impairment before a larger asset group that includes the intangible asset is assessed for recoverability.
  • Property, Plant and Equipment and Finite-Lived Intangibles - Property, plant and equipment held for use and finite-lived intangibles are subject to ASC 360-10. They are tested for recoverability whenever events or circumstances indicate that the carrying amount of the asset group may not be recoverable. If the asset group is not recoverable, its carrying amount is reduced to its fair value.
Alternatively, if an entity concludes that it will sell long-lived assets and the “held for sale” criteria are met, a loss should be recognized for a write-down of the disposal group to fair value less costs to sell.
  • Goodwill - Goodwill is subject to ASC 350.  It is tested for impairment at the reporting unit level at least annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.  When the carrying amount of a reporting unit is less than its fair value, the implied fair value of goodwill must be calculated to determine the amount of goodwill impairment, if any. Similar to indefinite- lived intangibles, an entity could choose to first perform a qualitative assessment to determine whether a quantitative assessment is needed. Goodwill is tested for impairment only after indefinite-lived intangible assets and amortizing assets, such as PP&E, have been assessed. Private companies currently have an option to elect a simplified method of accounting for goodwill. In addition, the amendments in ASU 2017-04, Simplifying the Test for Goodwill Impairment should be applied when effective, which is periods beginning after December 15, 2019 for public companies.[1] ASU 2017-04 may be early adopted. For additional information on ASU 2014-04 see BDO’s Flash Report here.
  • Contingent Losses - Liabilities related to natural disasters are addressed by ASC 450-20, in the absence of other GAAP (see discussion of “Exit Activities” below).  A liability should be accrued by a charge to income if it is probable that it has been incurred at the financial statement date and the amount of the loss can be reasonably estimated.  This includes, for example, the costs of repairs and maintenance that are not capitalized.
  • Exit Activities - Following a natural disaster an entity may choose to sell or terminate a line of business, close the business activities in a particular location, relocate the business activities from one location to another, make changes in the management structure, or undergo a fundamental reorganization that affects the nature and focus of operations. All of these items represent exit activities accounted for under ASC 420, Exit and Disposal Cost Obligations. These costs include:
    • Involuntary employee termination benefits pursuant to a one-time benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred compensation contract.
    • Costs to terminate a contract that is not a lease.
    • Other associated costs, including costs to consolidate or close facilities and relocate employees.
A liability for a cost associated with an exit or disposal activity is recognized at fair value in the period in which the liability is incurred, (except for a liability for one-time employee termination benefits that are incurred over time). If fair value cannot be reasonably estimated, the liability is recognized in the period in which fair value can be reasonably estimated.

A liability for costs that will continue to be incurred under an operating lease for its remaining term without economic benefit is recognized at the cease-use date.[2]
  • Temporary Differences and Deferred Income Tax Liabilities - Book recognition of reserves, accruals and impairments would likely impact the measurement of temporary differences and related deferred income taxes under ASC 740. Careful consideration of deferred income taxes including the valuation allowance is required in the period that book losses, reserves and impairments are recognized. The only exception is the impairment of nondeductible goodwill for which no deferred tax effect should be recognized. For income tax purposes, uncollectible receivables can be deducted when they are considered “worthless”. The worthlessness of a debt is a question of fact. Obsolete inventory can be deducted when it is no longer able to be used or sold in a “normal” manner and it is being disposed of through a liquidator or junkyard, a donation or it is destroyed.
  • Balance Sheet Presentation - Asset impairments and liabilities related to natural disasters should be recognized independent of any related insurance recoveries.  Liabilities are usually shown gross.  This is because the conditions for netting the liabilities against an insurance receivable under ASC 210-20 are not typically satisfied as the insurance receivable and claim liability are with different counterparties.
  • Income Statement Presentation - ASC 225-20-45-16 states a material event or transaction that an entity considers unusual, infrequent or both is reported as a separate component of income from continuing operations. The nature and financial effects of each event or transaction is presented separately or disclosed in notes to the financial statements. Gains or losses of a similar nature that are not individually material are aggregated.
Losses from natural disasters that are unusual, infrequent or both, should be reported as a component of income from continuing operations on the statement of operations or disclosed in the footnotes. 
Generally, a loss and the related insurance recovery may be presented in the same line item, as limited specific classification guidance exists for these items.
Involuntary Conversions
An involuntary conversion is the exchange, or conversion, of a nonmonetary asset (e.g., fixed assets) to monetary assets such as insurance proceeds.  To the extent the cost of a nonmonetary asset is less than the amount of monetary assets received, the transaction results in a gain.[3]  This is true even if the insurance proceeds are reinvested in replacement nonmonetary assets, such as new equipment.
In some cases, a nonmonetary asset may be destroyed or damaged in one accounting period and the amount of monetary assets to be received is not determinable until a subsequent accounting period. In those cases, any gain is recognized in accordance with the contingent gain guidance in ASC 450-30.  Specifically, the gain should be recognized when all uncertainties have been resolved (typically when cash is received), at which point it is considered realizable.  However, if the insurance recovery is determinable, such as when the insurance company does not dispute the claim, a recovery equal to the amount of the loss should be recognized when its receipt is considered probable.
  • Example - Assume that flooding caused physical damage to property and equipment. The damage to the equipment, having a carrying value of $1,000, was complete. The property was partially damaged; the portion of the building declared uninhabitable had an allocated carrying value of $5,000. There is insurance in place which will cover the cost to replace the equipment and repair the building, where the carrier has confirmed coverage of the claim and it is not being disputed by the insurance company. The estimated cost to do both is $10,000.
The company would record an impairment loss of $6,000 (and reduce its recorded balance of property and equipment) in the period of the flood. Further, the company would record an insurance recovery of $6,000 to reflect the proceeds from the insurance coverage to the extent of the asset write-off because recovery of that amount is considered probable in the circumstances. In the period the new equipment is purchased and repairs are made to the property, the company would record capital additions of $10,000.  Additionally, in the period the company receives the incremental $4,000 of proceeds from the insurance coverage, it would record a gain on the involuntary conversion of that amount. Note that if the insurance company in this example denied or contested coverage, it may be inappropriate for the company to record any benefit of the coverage until such time that all uncertainties surrounding the extent of coverage is resolved – usually at the time cash is received from the insurance company.
Insurance Proceeds
As mentioned previously, impairment losses are generally accounted for separate from any related insurance. With respect to accounting for insurance proceeds, GAAP includes the following guidance.
  • Business Interruption - Natural disasters often cause disruptions in operations which result in losses. These losses are often covered by business interruption insurance and should be accounted for separate from other insurance proceeds. ASC 225-30 covers the presentation of business interruption insurance and defines business interruption insurance as “insurance that provides coverage if business operations are suspended due to the loss of use of property and equipment resulting from a covered cause of loss. Business interruption insurance coverage generally provides for reimbursement of certain costs and losses incurred during the reasonable period required to rebuild, repair, or replace the damaged property.”
When losses incurred can be reasonably estimated and recovery is considered probable a receivable may be recorded. However, the amount recorded should not be greater than costs incurred to date. Therefore, proceeds for lost profits are treated as a contingent gain and typically recorded at the settlement date.
If business interruption insurance is received, entities may elect a policy for how such amounts are presented in the income statement as long as it does not conflict with other applicable GAAP.
In connection with business interruption insurance proceeds, the notes to the financial statements should disclose the nature of the event resulting in business interruption losses and the aggregate amount of business interruption insurance recoveries recognized during the period and the line items in the income statement in which those recoveries are classified.
  • Property and Casualty - The cash flow presentation of property insurance proceeds covering damage or loss depends on the nature of the property. For example, insurance proceeds received in connection with leased property would be classified as operating cash flows for an operating lease or as investing cash flows for a capital lease.
  • Cash Flow Statement Presentation - Since insurance proceeds are classified based on the nature of the insurance coverage rather than the intended use of the proceeds, amounts received for business interruption, inventory losses and operating lease assets are presented as operating activities.  If insurance proceeds are received for the loss of property, plant and equipment, they should be presented as investing cash flows.
In addition, when cash proceeds from insurance are significant, SEC registrants should disclose where the proceeds are classified in the statement of cash flows and discuss the insurance proceeds or settlements in MD&A. The discussion should include a description of the proceeds or settlement, why it was received, planned use for the receipts and any impact to reported earnings.
Derivative and Hedge Accounting
A key requirement for obtaining cash flow hedge accounting is that the hedged forecasted transaction is probable of occurring. Natural disasters can affect operations, causing some transactions to be curtailed, delayed or canceled. Companies that have designated forecasted transactions in cash flow hedging relationships e.g., purchases or sales of goods, or interest payments on debt, may determine that the hedged transaction is no longer probable of occurring within the originally specified time period, in which case hedge accounting should be discontinued prospectively. However, the related gains and losses in accumulated other comprehensive income should be reclassified in earnings only if it is probable that the forecasted transaction will not occur by the end of the period originally specified or within an additional two-month period thereafter. Reclassification of gains and losses would also affect deferred income tax accounting and intraperiod allocation under subtopic 740-20.
Natural disasters also may affect the eligibility for the “normal purchases and normal sales” scope exception to derivatives accounting for commodity contracts e.g., oil and gas. This exception is based on physical delivery and if that is no longer probable due to curtailment or cancelation of operations such that the contract instead would now settle net, the eligibility for applying this scope exception would no longer be met. Consequently, the contract should be recorded on the balance sheet at its current fair value and subsequently continue to be marked to fair value, similar to any other derivative.
Other Accounting Considerations
Natural disasters affect many aspects of a business. Additional consideration should be given to items such as debt, investments (including debt and equity securities, equity and cost method investments and investments in joint ventures), going concern, subsequent events, environmental remediation obligations, fair value estimates, and stock compensation.

In addition, entities should disclose the material event or transaction that gave rise to an unusual or infrequent loss, as described in ASC 225-20-45-16.  Entities should also consider disclosures about risks and uncertainties in ASC 275-10-50. Further, natural disasters may trigger incremental disclosures for SEC reporting purposes.
  • Additional Resources
    • SEC Press Release 2017-164, SEC Monitoring Impact of Hurricane Irma on Capital Markets, Continues to Monitor Impact of Hurricane Harvey
    • IRS News Release IR-2017-135, IRS Gives Tax Relief to Victims of Hurricane Harvey; Parts of Texas Now Eligible; Extension Filers Have Until Jan. 31 to File
For questions related to matters discussed above, please contact:
  Yosef Barbut
National Accounting Partner   Adam Brown
National Director of Accounting   Gautam Goswami
National Accounting Partner   Jennifer Kimmel
National Accounting Senior Manager   Jin Koo
National Accounting Partner   Jon Linville
National Accounting Director   Angela Newell
National Accounting Partner         [1] A public business entity that is not an SEC filer should adopt the amendments for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities, should adopt the amendments for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. [2] Upon the adoption of ASC 842, the right-of-use asset will be evaluated for impairment under ASC 360. [3] “Gain” refers to recovering amounts in excess of recognized losses.  

Significant Accounting & Reporting Matters Q3 2017

Tue, 10/10/2017 - 12:00am
Issued on a quarterly basis, the Significant Accounting and Reporting Matters Guide provides a brief digest of final and proposed financial accounting standards as well as regulatory developments. This guide is designed to help audit committees, boards and financial executives keep up to date on the latest corporate governance and financial reporting developments.

Highlights include:
  • FASB Developments
  • SEC & PCAOB Highlights
  • IASB Projects
  • And more!

SEC Flash Report - October 2017

Fri, 10/06/2017 - 12:00am
SEC Adopts Interpretive Guidance for Pay Ratio Disclosures Summary The SEC recently adopted interpretive guidance to assist companies in their efforts to make the pay ratio disclosures mandated by the Dodd-Frank Act.[1] The pay ratio rule requires issuers to disclose 1) the median annual total compensation of all employees, except the chief executive officer, 2) the annual total compensation of the CEO, and 3) the ratio of those two amounts in any annual report, proxy, or registration statement that requires disclosure of executive compensation pursuant to Item 402 of Regulation S-K.  The rule is effective for issuers with fiscal years beginning on or after January 1, 2017, which means that issuers will begin making the pay ratio disclosures in early 2018. 
  Details As the pay ratio rule permits the use of estimates, assumptions and statistical sampling to determine the median employee, some constituents expressed concern about the compliance uncertainty and potential liability associated with the required disclosures. The SEC’s interpretive guidance was partly issued to alleviate these concerns and states that the Commission will not take an enforcement action that challenges a registrant’s pay ratio disclosures if the estimates have a reasonable basis and are made in good faith.  The interpretive guidance also clarifies that:
  • The consistently applied compensation measure used to calculate the median employee may be derived from existing internal, such as tax or payroll, records even if those records do not include every element of compensation, for example, equity awards.
  • The determination of workers that meet the definition of an employee may be drawn from pre-existing published guidance under employment or tax laws.
The staff updated its compliance and disclosure interpretations to reflect the Commission guidance above and issued separate interpretive guidance to help registrants understand how they can utilize statistical sampling and estimates in making their pay ratio disclosures.  The guidance provides hypothetical examples related to the use of sampling and other reasonable methodologies.
For questions related to matters discussed above, please contact:
  Jeff Jamarillo
National Assurance Partner & Director of SEC Paula Hamric
National Assurance Partner    [1] Please refer to our BDO Flash Report on the pay ratio rule, adopted in 2015.  

BDO Knows: Revenue Recognition

Thu, 10/05/2017 - 12:00am
Topic 606, Revenue from Contracts with Customers - Exploring Transition Methods ASU 2014-09, Revenue from Contracts with Customers (Topic 606), comes into effect for public business entities (PBE) for annual reporting periods beginning after December 15, 2017, including interim periods within that year. Therefore, a calendar year-end public entity will reflect the new standard in its first quarter ending March 31, 2018, each subsequent quarter, and also in the year ending December 31, 2018. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year.
  Read More

SEC Flash Report - October 2017

Mon, 10/02/2017 - 12:00am
SEC Issues Updates to Reflect New Revenue Recognition Standard On August 18, 2017, the SEC staff released Staff Accounting Bulletin (SAB) No. 116 to conform its staff guidance on revenue recognition with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. SAB No. 116 states that SAB Topic 13, Revenue Recognition, and SAB Topic 8, Retail Companies, are no longer applicable once a registrant adopts ASC Topic 606. It also modifies Section A, Operating-Differential Subsidies of SAB Topic 11, Miscellaneous Disclosure, to clarify that revenues from operating-differential subsidies[1] presented under a revenue caption should be presented separately from revenue from contracts with customers accounted for under ASC Topic 606 or as a credit in the costs and expenses section of the statement of comprehensive income. Prior to adoption of ASC Topic 606, registrants should continue to refer to prior SEC guidance on revenue recognition topics.

The SEC also issued two releases to update its interpretive guidance on revenue recognition:  
For questions related to matters discussed above, please contact:
  Jeff Jaramillo
National Partner   Jin Koo
National Assurance Partner   Adam Brown
National Director of Acounting       [1] Revenues representing operating-differential subsidies under the Merchant Marine Act of 1936, as amended. Operating-differential subsidy is a payment made by the federal government to the owner-operator of a qualified American flag vessel to cover certain costs.

BDO Comment Letter - Exposure of Proposed Language to Section 14 of the Uniform Accountancy Act

Mon, 10/02/2017 - 12:00am
We understand that there has recently been disagreement about what may or may not be prohibited under Section 14 of the Uniform Accountancy Act as it relates to the use of management accounting designations by non-CPAs. We believe that the proposed phrase 'use an accounting designation that includes the word management' should be further developed to avoid any seeming contradiction with other sections of the Act.
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BDO Comment Letter - File No. PCAOB – 2017-01

Mon, 10/02/2017 - 12:00am
File No. PCAOB – 2017-01: Public Company Oversight Board; Notice of Filing of Proposed Rules on the Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, and Departures From Unqualified Opinions and Other Reporting Circumstances, and Related Amendments to Auditing Standards

BDO supports the Board's intention to monitor the implementation of critical audit matters, as we believe such monitoring will be critical to successful implementation.
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Corporate Governance Flash Report - September 2017

Thu, 09/28/2017 - 12:00am
PCAOB 2017 Inspections Will Continue to Focus Where Risk Resides Download PDF Version
Summary The PCAOB will continue to select the majority of issuer audits for inspection review on a risk-weighted basis – focusing on audit work on the most challenging areas, including financial statement accounts and disclosures requiring the highest degree of management judgment. Key areas of inspection focus continue to stem from recurring audit deficiencies, recent economic developments, and areas of significant judgment. Additionally, new accounting and auditing standards, multinational audits, and audit firms’ use of information technology and systems of quality control make the list as well.
  Details Timing and Population
The PCOAB has issued its August 2017 Staff Inspection Brief detailing information about the upcoming 2017 PCOAB inspections of registered audit firms.

Key Areas of Inspection Focus in 2017
Recurring audit deficiencies will again be key areas of focus this year including assessing and responding to risks of material misstatement, auditing accounting estimates, and internal control over financial reporting. While some corporations continue to argue that requirements from Sarbanes-Oxley Section 404(b) come at significant cost without perceived benefit, a study in the current issue of Auditing: A Journal of Practice & Theory provides statistical data correlating internal control environments with identified material weaknesses with significantly higher fraud risk than is found in the general population. 

Recent economic developments are garnering attention from the PCAOB and this may include M&A activity, international events such as Brexit, investments in higher risk instruments, fluctuations in oil and natural gas prices, and other industry specific risk factors.

Areas of significant judgement continue to represent more challenging audit areas and generally greater risk, including  considerations related to going concern analyses and income tax disclosures.

New accounting standards and new reporting requirements this year include the hot topics of FASB issued guidance on revenue recognition and lease accounting in addition to the newly enacted PCAOB audit rules requiring public auditor disclosures on Form AP. While the revenue and lease accounting guidance is not yet effective, audit firms can expect to answer questions on how they are assessing the readiness of their issuer clients’ plans for addressing and reporting on the pending accounting changes.

Audit firms themselves will attract PCAOB reviews for multinational audits, use of information technology, and audit firm systems of quality control. In today’s environment, firms are challenged to facilitate transparency and opine on the integrity of financial statements while managing similar external and competitive risk factors as issuers.  The PCAOB has expressed it is particularly interested in firms’ software audit tools, consideration of cybersecurity risk, and systems of quality control including: root cause analysis, independence, engagement quality reviews, and professional skepticism.

The Staff Inspection Brief also includes an appendix that contains historical data related to inspections of registered firms. This data indicates that revenues, receivables, non-financial assets, financial instruments, inventory, income taxes, and equity transactions as the most frequently inspected areas due to both materiality and risk.

For more information and educational opportunities on these and other topics related to audit committee oversight, please visit BDO’s Center for Corporate Governance and Financial Reporting.
For more information, please contact one of the following practice leaders: 
  Amy Rojik
Partner Lee Sentnor
Senior Manager

2017 BDO Cyber Governance Survey

Mon, 09/25/2017 - 12:00am

Explore the 2017 BDO Cyber Governance Survey:
As the governance needs of corporate America continue to grow and diversify, directors at publicly traded companies are constantly being asked to do more. In recent years, perhaps no area of board responsibility has grown faster than the oversight of an organization’s cybersecurity. 

The BDO Cyber Governance Survey, conducted annually by the Corporate Governance Practice of BDO USA, was created to act as a barometer to measure the involvement of public company directors in cyber-risk management. The 2017 BDO Cyber Governance Survey, conducted in August of 2017, examines the opinions of 140 corporate directors of public company boards with revenues ranging from $250 million 
to more than $1 billion. 
  “Earlier this year, a group of U.S. Senators introduced legislation - the Cybersecurity Disclosure Act of 2017 – intended to promote transparency in the oversight of cybersecurity risks at publicly traded companies. The bill would require that annual reports to the SEC must disclose the level of cybersecurity expertise of the board; or, if none exists, what other steps the reporting company has taken to address cybersecurity. The bill is just the latest salvo from legislators, regulators and good governance advocates in the ever-expanding cyber-war,” said Gregory A. Garrett, Leader of International Cybersecurity at BDO USA. “For the past four years, BDO USA has surveyed public company board members on their role in planning for and mitigating cyber-attacks at their companies. The annual survey has documented the continued ascension of cybersecurity in corporate boardrooms, as directors are being briefed more often and are responding with increased budgets to address this critical area. It also suggests where boards may need to better focus their efforts.”
Cyber-Risk Management  According to the 2017 BDO Cyber Governance Survey, more than three-quarters (79%) of public company directors report their board is more involved with cybersecurity than it was 12 months ago. A similar percentage (78%) say they have increased company investments during the past year to defend against cyber-attacks, with an average budget expansion of 19 percent. This is the fourth consecutive year that board members have reported increases in time and dollars devoted to cybersecurity. 

Almost one in five (18%) board members indicate that their company experienced a cyber-breach during the past two years, a percentage very similar to the previous two years (22%). 

A majority (61%) of corporate directors say their company has a cyber-breach/incident response plan in place, compared to less than a fifth (16%) who do not have a plan, and close to one-quarter (23%) who are not sure whether they have such a plan. Those with plans represent approximately the same percentage as a year ago (63%), but reflect a major improvement from 2015, when less than half (45%) of directors reported having one.
  “When considering the responses of board members regarding whether their company has experienced a cyber-breach, it is important to note that many companies do not report their breaches and, in other instances, businesses can be unaware they have been hacked. Given those realities, we view this particular finding as generally appearing lower than reality,” said Eric Chuang, Managing Director of Cyber Incident Response at BDO USA. “The continuing year-over-year increases in board involvement and investments in cybersecurity is extremely positive, but the percentage of businesses with breach response plans in place – although much improved from two years ago – is still far below where it needs to be.”    BDO FOOD FOR THOUGHT

Earlier in 2017, an Executive Order signed by President Trump outlined a very specific call to action to safeguard the critical cyber infrastructure of the U.S. government, sending a powerful message that cyber risk management is, and should be, of utmost importance to all organizations. As cybersecurity is rightly elevated to those charged with governance, BDO continues to explore various aspects of board-level risk management efforts that directors should keep top of mind, including:

   Briefing Frequency Close to four-fifths (79%) of public company board members report that their board is more involved with cybersecurity than it was 12 months ago. The vast majority of directors (91%) are briefed on cybersecurity at least once a year – this includes more than a quarter (28%) that are briefed quarterly, and better than one-fifth that are briefed twice a year (21%). The balance are briefed annually (36%) or more often than quarterly (6%). 

Surprisingly, nine percent of board members say they are not briefed at all on cybersecurity. However, during the four years BDO has conducted this survey, the percentage of directors reporting no cybersecurity briefings has dropped consistently (see chart to the right).

Lack of Sharing on Cyber-Attacks Despite this positive progress, the survey also found that businesses still fail to share information on cyber-attacks with entities outside of their company.

Sharing information gleaned from cyber-attacks with external entities is a practice that needs to become more prevalent for the safety of critical infrastructure and national security. The U.S. government has communicated ways in which businesses can contact relevant federal agencies about cyber incidents.

Unfortunately, when asked whether they share information they gather from cyber-attacks, only one-quarter (25%) of directors – virtually unchanged from 2016 (27%) - say they share the information externally. A similar proportion (24%) say they do not share the information with anyone and approximately half (51%) are not sure whether they do or not.

Of those sharing information on their cyber-attacks, the vast majority (86%) share with government agencies (FBI, Department of Homeland Security (DHS)) and close to half (47%) share with ISAC (Information Sharing & Analysis Centers). Very few (8%) share with competitors.

  “For the second consecutive year, the survey reveals a continued vulnerability in cybersecurity – the ongoing failure of companies to share information they’ve gathered from cyber-attacks with federal agencies, ISACs, or competitors,” said John Riggi, Managing Director of Cybersecurity and Financial Crimes at BDO USA. “Sharing information gleaned from cyber-attacks is a key to defeating hackers, yet just one-quarter of directors say their company is sharing that information externally. This behavior needs to change if corporate America is to prevail in the cyber wars.”    BDO FOOD FOR THOUGHT

In certain situations, concerning cybersecurity, the FBI and DHS could truly be viewed as a corporate director’s two best friends. Relationships with law enforcement and other key advisors should be cultivated before they are needed in order to avoid or mitigate a cyber breach. Information-sharing (e.g., critical intelligence provided before disaster strikes) can help companies better protect themselves from costly attacks that can cause major disruptions to their business, and seriously undermine relationships and a company’s reputation.

Ransomware  Earlier this year, the “Wanna Cry” cyber-attack, which impacted businesses in more than 150 countries, greatly raised awareness of the threat posed by ransomware. When asked whether their company had taken steps to minimize its vulnerability to ransomware, a majority (60%) indicate they are addressing this threat. 

Of those targeting ransomware vulnerabilities, a majority (58%) are placing an increased emphasis on patch management and increasing the frequency of data back-ups (58%). Close to half (46%) say they have increased their ability to restore data faster.

  “This year’s study indicates that most boards are aware of the rising threat of ransomware and they are taking steps to proactively address this risk,” said Gregory Garrett. “Given the significant threat posed by ransomware, it is important that the sizeable minority of board members who say they have yet to take steps to minimize their vulnerability to this risk, do so as soon as possible.”    BDO FOOD FOR THOUGHT

Given the breadth and depth of exposure to Wanna Cry, Petya Marks and Hidden Cobra malicious software, BDO encourages companies to focus on human behavior, mitigation strategies, patch applications, monitoring, and the development and testing of an incident response plan to prevent falling victim to similar malware attacks in the future.

   SOC for Cybersecurity  Earlier this year, the American Institute of Certified Public Accountants (AICPA) introduced a Cybersecurity Risk Management Framework—also known as “SOC (System and Organization Controls) for Cybersecurity”—that provides companies with a proactive approach for designing a risk management program and communicating about its effectiveness. When asked about this initiative, just four in 10 directors are familiar with it. 

Of those that are aware of the AICPA’s new voluntary risk management framework, more than a third (35%) indicate that they are likely to utilize both readiness testing and formal audit/attestation for their program. A little more than one-quarter (27%) indicate they will just utilize the readiness testing for their programs, while a much smaller minority (6%) plan to use the formal audit/attestation exclusively. Almost one-third (32%) indicate they either do not plan to utilize the framework (14%) or were unsure (18%) if they would.

  “Many businesses already have programs in place to help them assess how they are handling cyber-risk. The AICPA’s Cybersecurity Risk Management Framework was created to augment those efforts by providing an independent assessment of a company’s cyber-risk management,” said Jeff Ward, National Managing Partner for Third Party Attestation Services at BDO USA. “Given the fact that the framework was rolled out just a few months ago, it isn’t surprising that only 40 percent of board members are aware of it. More importantly, of those aware of the framework, better than two-thirds (68%) indicate that their company is likely to utilize at least one of the related services. This demonstrates that boards are very invested in cybersecurity and they are eager to have an independent assessment communicate the effectiveness of their efforts.”    BDO FOOD FOR THOUGHT

SOC for Cybersecurity is designed to help standardize the way organizations define their cybersecurity objectives and report against them. Explore BDO’s thought leadership and archived webinar highlighting the benefits of SOC reporting and outlining which approach within the framework may be best for your organization.

    Conclusion  Cybersecurity will continue to demand the attention and resources of almost all organizations, and the table stakes for those charged with governance at public companies are significant. Both the investment and regulatory communities are paying close attention. 

In 2017, the New York Department of Financial Services (DFS) put forth a ground-breaking regulation applicable to thousands of financial institutions that do business in the state of New York. The first-of-its-kind regulation shines a bright light on the responsibility of boards. In addition to designating a qualified individual (e.g., a Chief Information Security Officer) to oversee, implement and enforce the organization’s cybersecurity program and report to the board or a senior officer at least annually, the regulation holds company board members and senior officers personally liable for ensuring annual compliance certification. 

With cybersecurity threats on the rise for organizations of all sizes and in all industries, boards are encouraged to remain abreast of cybersecurity developments and continue to educate themselves and their organizations. Companies must be able to detect and mitigate cyber breaches that have the potential to disrupt business operations, damage their brand, and cause significant financial losses. To hear more about BDO’s observations, tune into our “2017 What’s on the Minds of Boards” webinar. For additional hot topics in corporate governance, refer to the 2017 BDO USA Survey on Financial Reporting and Corporate Governance issues.
BDO Cyber Governance Survey These are just a few of the findings of the 2017 BDO Cyber Governance Survey, conducted by the Corporate Governance Practice of BDO USA in August 2017. The annual survey examines the opinions of 140 corporate directors of public company boards regarding corporate governance and financial reporting issues. 

BDO USA’s Corporate Governance Practice is a valued business advisor to corporate boards. The firm works with a wide variety of clients, ranging from entrepreneurial businesses to multinational Fortune 500 corporations, on myriad accounting, tax, risk management and forensic investigation issues.
For more information, please contact:
  Amy Rojik   John Riggi   Eric Chuang   Michael Stiglianese   Gregory Garrett   Jeff Ward   Stephanie Giammarco    

EBP Commentator - Summer 2017

Wed, 09/20/2017 - 12:00am

Download PDF Version
  Table of Contents     LOL... ROFL… BRB…

With the advent of social media, there has been a proliferation of new acronyms making their way into our everyday language. Even those who are not social media savvy may likely recognize some of these popular acronyms: LOL - Laughing Out Loud; ROFL – Rolling On Floor Laughing; BRB – Be Right Back. Similar to the world of social media, there are many acronyms pertaining to Employee Benefit plans (EBP). This edition explores several EBP acronyms we believe would be beneficial for plan sponsors to understand.

RMD Contributed by Wendy Schmitz
RMD is short for Required Minimum Distributions. The Internal Revenue Service (IRS) does not allow retirement funds to be kept tax free indefinitely. At age 70½ participants are required to withdraw a minimum amount from their Individual Retirement Account (IRA), Simplified Employee Pension (SEP) IRA, SIMPLE IRA (Savings Incentive Match Plan for Employees), or retirement plan account (with some exceptions for Roth IRAs).

These distributions are not generally tax free nor can taxes be avoided by rolling the RMD into another tax-deferred account. The account owner is taxed at their regular income tax rate on the amount of the RMD withdrawn. Depending on the dollar amount of the RMD, no tax withholdings may be deducted from the amount distributed; however, the taxes would then need to be trued up on the account owner’s annual federal tax return.

Sponsors of retirement plans (including 401(k), 403(b) and defined benefit pension plans) are required to ensure that RMDs occur timely. Despite the fact that a participant may be receiving RMDs[1], the sponsor is required to continue to make contributions on behalf of that participant (in accordance with the plan document) as well as allow the participant to continue to make salary deferrals, if appropriate.

For a participant’s first RMD, the RMD may be delayed until April 1st of the year after the participant turns age 70½. For all subsequent years (including the year in which the participant first receives an RMD which was delayed to April 1st), RMDs must be made by December 31st. RMDs may also be delayed for participants who are still employed (although generally not available to employees who are deemed to be a 5% owner and certain relatives of such an owner) as well as for older 403(b) accounts (generally pre-1987 accounts).

Required minimum distribution rules also apply after a participant’s death. In general, the IRS requires RMDs of the participant’s death benefit even if death occurs before age 70½. Consultation with a qualified tax expert would be needed as death benefits are a complicated tax area.

Watch for changes in plan demographics since RMDs may become more common with an aging participant population. Some plan sponsors employ third party service providers, such as the plan record-keeper, to administer the RMDs. However, the ultimate responsibility of ensuring the plan is operated in accordance with the IRS rules and regulations still remains with the plan sponsor. Plan sponsors should obtain an understanding of the processes used by the service provider as well as what input or approvals the service provider requires from the plan sponsor in order to perform the distribution. Additionally, sponsors should monitor the service providers to ensure the RMDs are made on a timely basis.

There are consequences if RMDs are not made timely. For the individual participant, the amount not withdrawn timely is taxed at a 50% rate. In a worst case scenario, a failure to make timely RMDs to eligible participants could cause loss of the tax exempt status for the plan, which would have devastating effects on all plan participants as well as significant tax consequences for the plan sponsor. However, this is generally rare as regulators try to avoid plans disqualifications, due to the harm it causes participants. Regulators instead provide sponsors with the opportunity to correct operational defects, such as this, through the IRS correction program, Employee Plans Compliance Resolution System (more commonly referred to as EPCRS, yet another industry acronym). Under EPCRS, a plan sponsor may use either the Self-Correction Program (SCP) or the Voluntary Correction Program (VCP) to correct RMD failures. There are benefits to both methods. The SCP, which is generally for small timely identified errors, does not require a filing or filing fee with the IRS whereas the VCP requires filing of a form and payment of a filing fee. A key benefit to the VCP is that the IRS will waive the 50% participant tax if the plan sponsor requests the waiver as part of the filing submission. If the VCP is not used and the participant requests a waiver, each affected participant or beneficiary must individually apply for a waiver of the 50% tax using the Form 5329 as part of their federal income tax return.

Understanding and monitoring RMDs is an important focus for sponsors since there are, to put it in social media terminology, consequences IRL (In Real Life) for missed or untimely RMDs. On a more serious note, RMDs are complex and consultation with a qualified tax expert is recommended. BDO is available to assist sponsors and fiduciaries in addressing the rules and considerations associated with RMDs.

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MEP Contributed by Mary Espinosa
Multiple Employer Plans (also known as MEPs) are sometimes incorrectly interchanged with Multiemployer Plans. Despite the misperception, these terms are not the same and are actually very different:
  • MEPs are either defined benefit or defined contribution retirement plans adopted by two or more employers that are not treated as related entities (in other words, the employers are not members of a controlled group, commonly controlled group or affiliated service group).
  • Multiemployer refers to a plan maintained under one or more collective bargaining agreements to which more than one employer (usually within the same industry, such as a labor union) is required to contribute.
MEPs can be structured in various ways. An open MEP is offered to employers that have no connection to each other aside from their participation in the MEP. Open MEPs are generally provided by an independent investment advisory firm or an organization created specifically to provide benefits to smaller employers. Alternatively, a closed MEP is generally sponsored by an industry or trade group. In a closed MEP, the employers must have the ability to control or exercise authority over the MEP. A Professional Employer Organization (PEO) is an arrangement whereby the PEO hires the client company’s employees and is the employer of record for tax and insurance purposes. The MEP is sponsored by the PEO and adopted by the PEO’s clients. A common ownership MEP is when the adopting employers do have some common ownership, but the ownership is insufficient for them to be considered related employers under the Internal Revenue Code (IRC).
Two or more employers can also pool their contributions to provide group health and other welfare benefits, such as dental, vision, life and disability in Multiple Employer Welfare Arrangements (MEWAs). Contributions can be made by both employees and employers based on the estimated costs associated with the number of covered employees. MEWAs are offered by the same types of organizations that sponsor MEPs.
Under the IRC, a MEP is treated as a single plan and must comply with certain qualification rules, including the exclusive benefit requirement, eligibility and vesting, etc. However, a MEP may or may not be treated as one plan under the Employee Retirement Security Act of 1974 (ERISA). For example, open MEPs usually do not meet the common interest criteria and, as such, each adopting employer is considered to be maintaining a separate plan and therefore each plan potentially may have both a separate Form 5500 filing requirement as well as a separate audit requirement, depending on the number of participants. In its Advisory Opinion 2012-04A, the Department of Labor (DOL) discusses the criteria it considers in determining whether a MEP may or may not be treated as one plan. Such criteria includes how members are solicited, who is entitled to participate, the purposes for which the association was formed, and who controls and directs the activities and operations of the benefit program.
MEPs and MEWAs may provide a solution for small employers looking to provide large plan benefits to their employees, while at the same time reducing administrative and cost burdens and minimizing fiduciary responsibility (including reporting and disclosure requirements). However, there are complexities associated with these plans. For instance, depending on whether the MEP is structured as closed or open, there may be a need for separate adoption agreements for each adopting employer, etc. Additionally, there may be limitations on an employer’s ability to exit a MEP and the ability of that employer’s employees to take their money out of the plan. Since the exit of one employer would not ordinarily terminate a MEP, technically the plan has not experienced a distributable event and, if there is no distributable event, employees would then be required to wait until a distributable event occurs in order to take a distribution.

The IRS provides guidance on MEPs through its IRS Internal Revenue Manual, Part 7, Chapter 11, Section 7 (Section 6 discusses multiemployer plans). IRS FAQs also address frequent questions the IRS receives.

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HWC Contributed by Joanne Szupka and Chelsea Smith Brantley

There’s no doubt about it – how we communicate (HWC) benefit information to employees can be challenging. According to a recent study released by the International Foundation of Employee Benefit Plans (IFEBP), 65% of the employers noted employee benefit education is a high priority[2] for their organization. Despite prioritizing such education, only 19% of the respondents indicated their employees have a high level of understanding regarding employee benefits. This low level of understanding may be linked to employees not opening or reading employer communication materials as 80% of the employers surveyed cited this as a problem. Clearly, there is a communication gap.

Communicating with employees about available benefits (whether retirement, medical or other) is a key responsibility of Human Resource personnel. Earlier this year, we conducted our own survey as to how people prefer to receive their information. Here is how the results stacked up:
  An overwhelming majority (92%) noted that they prefer email for benefit-related communications whereas only 8% would opt to receive the information via video-conference. Our survey respondents voted down other methods of communication, such as in-person, over the phone, Skype or text.

Of course, how such information is communicated is only one component of effective benefit plan communications. Here are three critical mistakes typically found in benefits communication and how to fix them:

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LUFTR Contributed by Darlene Bayardo and Chelsea Smith Brantley 
Here are some of the Latest Updates From The Regulators (LUFTR):
  Hurricanes Harvey and Irma Relief Due to the impact of Hurricanes Harvey and Irma, government agencies have announced relief measures, several of which directly impact employee benefit plans as highlighted below:
  • The IRS has granted relief to impacted taxpayers, which includes the postponement of several tax filing and payment deadlines.  The relief provides an automatic extension of time to file certain tax returns through January 31, 2018. This includes taxpayers who had a valid extension to file their 2016 returns (including Form 5500) through October 16, 2017.
  • The IRS also announced that employer-sponsored retirement plans can make participant loans and hardship distributions available to participants and certain members of their families who live or work in the affected disaster areas designated for individual assistance by the Federal Emergency Management Agency (FEMA). It relaxes procedural and administrative rules that normally apply to participant loans and hardship distributions, including the abatement of the six-month ban on employee contributions following the hardship distribution. This relief also allows individuals who live outside the disaster area to take a loan or hardship distribution to assist family or other dependents who live or work in the disaster area. However, the IRS has stressed that the tax treatment of such loans and distributions remains unchanged. The relief is available through January 31, 2018.
  • The PBGC has announced it is waiving late premium payment penalties and extending certain other deadlines for affected plans. The PBGC’s announcement provides information on the disaster relief, including which plans are eligible and how to make a claim for relief.
  • The AICPA has extended the public comment period on the proposed Statement on Auditing Standards (SAS), Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA from the original deadline of August 21, 2017, to September 29, 2017. As discussed in our Spring 2017 edition, there are significant proposed changes in the Exposure Draft. Responses should be submitted to Sherry.Hazel@aicpa-cima.com.

  • The IRS issued a memorandum in April 2017 to the Employee Plans (EP) staff confirming that a cash balance formula based on only a portion of the participant’s annual compensation can meet the “definitely determinable” requirement so long as the formula is not subject to employer discretion under the plan provisions. The memorandum states that, if a plan provides for employer discretion to determine the portion of compensation taken into account, that plan violates the “definitely determinable” rule and therefore the plan will not be treated as a qualified plan for tax purposes. On the other hand, if the plan terms do not allow for employer discretion, benefits will be considered “definitely determinable” even though the employer may have the inherent ability to determine the amount of compensation. Sponsors of cash balance plans should assess the cash balance formulas to ensure they meet the “definitely determinable” requirement under this guidance.

  • The IRS released Notice 2017-37 in June 2017, which provides the Cumulative List of Changes in Plan Qualification Requirements for Pre-Approved Defined Contribution Plans for 2017. This list identifies updates in the qualification requirements of the IRC, which must be incorporated in plan documents submitted to the IRS when requesting an opinion letter through the pre-approved plan program.

  • IRS Revenue Procedure 2017-41 released July 2017, outlines revised IRS procedures regarding issuance of opinion letters on qualification of pre-approved plans and discusses the elimination of separate pre-approved letter programs for volume submitter and master and prototype programs through the creation of a single opinion letter program. The Rev. Proc. is intended to encourage employers to switch from individually designed plans to pre-approved plans and is effective October 2, 2017.

  • In July 2017, the IRS released Rev. Proc. 2017-43, which includes changes to the existing procedures for a suspension of benefits under a multiemployer defined benefit pension plan that is in “critical and declining status.” The Rev. Proc. must be followed and is effective for applications submitted to the Treasury Department for approval of a suspension of benefits on or after September 1, 2017.

  • As discussed in our Spring 2017 edition, the IRS recently issued guidelines for substantiating safe-harbor hardship distributions from 401(k) and 403(b) retirement plans. The IRS hosted a podcast in July 2017, that addressed guidelines provided to IRS agents who audit plans on how to review hardship distributions where sponsors have elected to use the “summary substantiation” method. The discussion highlighted that plan sponsors and third party administrators should review the guidelines in conjunction with plan procedures and processes when setting plan procedures. A recording of the podcast is available at https://www.stayexempt.irs.gov/Home/Resource-Library/Retirement-Plan-Resources.


  • The DOL’s fiduciary rule currently has a phased-in transition period (with respect to the rule’s specific disclosures and representations) that ends January 1, 2018. The DOL recently requested information from the public regarding the rule, including whether the compliance date should be delayed. It has now asked the Office of Management and Budget for a delayed compliance deadline of 18 months until July 1, 2019. In the request, the DOL noted that it is contemplating lessened restrictions on the types of transactions permitted under the rule, which affects certain insurance products and rollovers of IRAs.

  • In August 2017, the DOL issued FAQs explaining the interaction of the fiduciary rule with the 408(b)(2) service provider fee disclosure rules. The FAQs address:

    • The impact of the fiduciary rule on 408(b)(2) disclosures as covered service providers who provide (or expect to provide) fiduciary services are generally required to affirm whether they are acting as a fiduciary.

    • Whether recommendations to participants or IRA owners to contribute or increase contributions to a plan or IRA constitute fiduciary investment advice.

    • Whether recommendations to employers and other plan fiduciaries on plan design changes intended to increase plan participation and plan contribution rates constitute fiduciary investment advice.


The Public Company Accounting Oversight Board (PCAOB) has adopted a new auditing standard, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, that applies to audits conducted under PCAOB standards, including audits of employee benefit plans that file an annual report with the Securities and Exchange Commission on Form 11-K.

The new standard includes a requirement for the auditor's report to disclose the tenure of an auditor, specifically the year in which the auditor began serving consecutively as the entity's auditor. In addition, it will also include the phrase, "whether due to error or fraud," in describing the auditor's responsibility under PCAOB standards to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements.

Plans subject to filing a Form 11-K are exempt from the requirement to include a discussion of the critical audit matters[3] (CAMs) in the auditor’s report, but may choose to do so voluntarily. The standard is effective for audits for fiscal years ending on or after December 15, 2017.

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Events, People and Places Society for Human Resource Management (SHRM) Annual Conference and Exposition

EBP Assurance and Tax professionals, Grand Rapids Assurance Director Luanne MacNicol (left) and ERISA National Practice Leader and Specialized Tax Services Managing Director Kim Flett (right) attended the national SHRM conference in New Orleans, Louisiana in June, 2017. Representing BDO at the executive booth with the theme “We’ve Got You Covered,” Luanne, Kim and other BDO professionals met with attendees from all over the world. Employee benefit plans were the topic of discussion with matters ranging from plan audits, compliance reviews, plan design and other benefits administration. This important conference provided an opportunity to demonstrate BDO’s skilled knowledge and expertise in the many complex areas of employee benefit plans.

  Meet BDO’s National Practice Leader for Employee Benefit Plan Audits

Beth Garner leads BDO’s National Employee Benefit Plan audit practice. A partner in BDO’s Atlanta office, she is actively involved in EBP activities within both the firm and various industry and professional organizations, including the AICPA Employee Benefit Plan Audit Quality Center Executive Committee. Beth brings a depth of experience as a long-time EBP auditor as well as a client’s perspective on the challenges facing plan sponsors from her prior private industry career experience. Through her leadership, BDO continues to pursue excellence in both audit quality and client service.

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Our EBP Center of Excellence is dedicated to assisting plan sponsors in addressing their various EBP needs. For more information on BDO’s EBP services, please contact a member of our practice leadership:

Beth Lee Garner
National Practice Leader      Luanne MacNicol, Grand Rapids
Central EBP Regional Leader   Darlene Bayardo
National Assurance   Wendy Schmitz, Charlotte
Atlantic EBP Regional Leader   Mary Espinosa, Orange County
West EBP Regional Leader   Joanne Szupka, Philadelphia
Northeast EBP Regional Leader   Jody Hillenbrand, San Antonio
Southwest EBP Regional Leader   Jam Yap, Atlanta
Southeast EBP Regional Leader    

[1] RMDs may be taken on an annual basis. Additionally, as the name implies, these distributions are just minimums; a participant may be eligible to take additional distributions, if desired.
[2] https://www.ifep.org/pdf/benefits-communication-survey-results.pdf
[3] These are matters that have been communicated to the audit committee, are related to accounts or disclosures that are material to the financial statements, and involve especially challenging, subjective, or complex auditor judgment.

Relief Measures Impacting Employee Benefit Plan Sponsors

Fri, 09/15/2017 - 12:00am
In response to Hurricanes Harvey and Irma, the IRS announced that employer-sponsored retirement plans can make participant loans and hardship distributions available to participants and certain members of their families who live or work in the affected disaster areas designated for individual assistance by the Federal Emergency Management Agency (FEMA) – relaxing procedural and administrative rules that normally apply to participant loans and hardship distributions, including the abatement of the six-month ban on employee contributions following the hardship distribution.
This relief also allows individuals who live outside the disaster area to take a loan or hardship distribution to assist family or other dependents who live or work in the disaster area. However, the IRS has stressed that the tax treatment of such loans and distributions remains unchanged. The relief is available through January 31, 2018.
The Department of Labor has issued compliance guidance for impacted plans and FAQs for affected participants and beneficiaries.
The Pension Benefit Guaranty Corporation (PBGC) has announced it will waive late premium payment penalties and extending certain other deadlines for affected plans. The PBGC’s announcement provides information on the disaster relief, including which plans are eligible and how to make a claim for relief.
BDO Disaster Response In an effort to help to those impacted, government agencies have announced relief measures, from tax extensions and hardship distributions to tax-exempt employer assistance, and even guidance on cyber threats related to hurricane relief.
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