Presenting a live 110-minute teleconference with interactive Q&A Sales and Use Tax Reserve Strategies Under Latest SEC Orders and Guidance Best Practices for Setting Reserves Amid Government and Audit Scrutiny TUESDAY, MARCH 12, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: William Ault, Director, Crowe Horwath , New York Myron Vansickel, National Tax Director, Strategic Accounts, Experis , Washington, D.C. For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Sales and Use Tax Reserving Strategies Under Latest SEC Orders and Guidance Seminar March 12, 2013 William Ault, Crowe Horwath Myron Vansickel, Experis william.ault@crowehorwath.com myron.vansickel@experis.com
Today’s Program Review Of Material Terms Of ASC 450 Slide 8 – Slide 20 [William Ault] Hypothetical Taxpayer Sales Tax Reserving Scenarios Slide 21 – Slide 54 [Myron Vansickel]
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 7
William Ault, Crowe Horwath REVIEW OF MATERIAL TERMS OF ASC 450
Loss Contingencies: Material Terms I. Recognition - Probable, reasonably probable and remote - Estimable - What is a liability and what is a loss contingency? II. Measurement rules and an estimated range of loss III. Disclosure rules: Probable and reasonably possible contingencies IV. Recent end to FASB’s project on loss contingency disclosure requirements 9
Recognition Of A Loss Contingency An estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met: a. Information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss. b. The amount of loss can be reasonably estimated. 10
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Probable, Reasonably Possible Or Remote? Probable: The future event or events are likely to occur. Reasonably possible: The chance of the future event or events occurring is more than remote but less than likely. Remote: The chance of the future event or events occurring is slight. 12
Can The Amount Of The Loss Be Reasonably Estimated? The requirement that the loss be reasonably estimable is intended to prevent accrual in the financial statements of amounts so uncertain as to impair the integrity of those statements. Disclosure is preferable to accrual when a reasonable estimate of loss cannot be made. Does it relate to the current period or a prior period? 13
Loss Contingency Vs. Liability A loss contingency is defined as an existing condition, situation or set of circumstances involving uncertainty as to possible loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. Amounts owed are not contingencies even though the accrued amounts may have been estimated. There is nothing uncertain about the fact that those obligations have been incurred. 14
Measurement Of A Loss Contingency When both of the recognition criteria are met, and the reasonably estimable loss is a range, accrual is required of: - The amount that appears to be a better estimate than any other estimate within the range, or - The minimum amount in the range, if no amount within the range is a better estimate than any other amount. 15
Disclosure When A Loss Contingency Is Not Recognized Disclosure of the contingency shall be made when there is at least a reasonable possibility that a loss or an additional loss may have been incurred. The disclosure shall indicate the nature of the contingency and shall give an estimate of the possible loss or range of loss, or state that such an estimate cannot be made. 16
Disclosure When A Loss Contingency Is Not Recognized (Cont.) Disclosure is not required of a loss contingency involving an unasserted claim or assessment, when there has been no manifestation by a potential claimant of an awareness of a possible claim or assessment, unless: - It is considered probable that a claim will be asserted, and - There is a reasonable possibility that the outcome will be unfavorable. Information may become available indicating that an asset was impaired or a liability was incurred after the date of the financial statements, or that there is at least a reasonable possibility that an asset was impaired or a liability was incurred after that date. 17
The FASB’s Loss Contingency Disclosure Project Ends Decision reached at the July 9, 2012 board meeting: The staff summarized its outreach with regulators and provided a short review of the feedback received on the two previous exposure drafts. The staff posed the question to the board as to whether the project should remain on the agenda, and if so what the next steps are. The board voted 5-2 to remove the project from the agenda, with no further action. 18
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Scope Of FASB July 2012 Invitation To Comment The invitation to comment applies only to notes to financial statements. It does not address parts of a financial report outside of financial statements, such as management’s discussion and analysis (MD&A). The invitation to comment applies to financial statements of public and non-public entities. 20
Myron Vansickel, Experis HYPOTHETICAL TAXPAYER SALES TAX RESERVING SCENARIOS
Case Study: Application Of ASC 450 Sales and use tax reserves have come under more scrutiny as a result of the enactment of the Sarbanes-Oxley Act and pressure on state and local jurisdictions to raise revenue. The SEC is now following up on contingent liabilities as well. Senior management has become aware of internal controls to understand what is in each reserve, and sales and use taxes have greater visibility before the C-suite now. 22
Nexus Reviews Regarding nexus, as it relates to the level of activities a business performs within a given state and meaning a connection such that the taxpayer enjoys state benefits such as courts, fire and police protection - Review what activities a state dictates that create nexus for sales tax collection and/or use tax payments - Review business expansion plans, when possible, in order to be proactive on identifying new states where nexus has been created - Nexus meaning a connection to the State where the taxpayer in is enjoying the benefits the State has to offer, such as, the state courts, fire and police protection. 23
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