GAAP Flash – Tax reform, CECL, and audit documentation – 11.10.17
GAAP Flash – Tax reform, CECL, and audit documentation – 11.10.17

GAAP Flash – Tax reform, CECL, and audit documentation – 11.10.17

This week’s GAAP Flash includes articles about a proposed tax reform to incentivize companies to bring money back from overseas, next tax rules for “pass-through” businesses, the need to prepare for CECL, and four best practices to improve audit documentation.

Tax proposal could pave the way for companies to bring money back to the U.S. (November 2, 2017) – Wall Street Journal (@WSJ)

The House Republican tax plan has proposed a mandatory, one-time 12% tax on pre-existing foreign earnings, regardless of whether that cash is repatriated to the US. Currently, US companies hold more than $1.3 trillion of cash overseas and under the current proposal, companies would be able to bring future profits back to the US tax-free. However, the tax proposal limits the deductions that businesses receive for the interest that is paid on debt, so the incentive to borrow money in the US and keep overseas earnings out of the US may be scrapped under the new tax rules.

How It’s Relevant: The article states that Apple, Microsoft, Alphabet (Google), Cisco Systems, and Oracle hold a combined $594 billion in overseas cash (as of 12/31/16), which means these five companies could pay over $71 billion combined on their offshore holdings! Being able to bring that kind of cash back tax-free would provide companies with opportunities to change their capital return strategies and possibly improve overall economic conditions within the US. Keeping cash overseas and the related tax implications have been a topic for quite some time; we even wrote this blog about this very same issue back in 2015!

A juicy tax break - and the rules to keep everyone from taking it (November 3, 2017) – Accounting Today (@AccountingToday)

The goal of the new tax bill was to simplify the tax code but a special rate for “pass-through” business could do exactly the opposite. A majority of US businesses are set up as a pass-through business, which is when profits are passed through to owners untaxed and are then reported as income on their individual tax returns. The new tax bill reduces rates for pass-throughs to a new maximum of 25%, but many services providers such as doctors, lawyers, accountants, and financial service providers are excluded from the new lower pass-through rate.

How It’s Relevant: To add further complexity, other pass-through businesses would have 70% of their income classified as wages, which would be subject to higher federal rates, and only 30% of their income would receive the lower pass-through rate. The new bill offers a series of formulas to determine how much of a business’s income would be subject to the pass-through rate and it has left many scratching their heads. We are all trying to wrap our heads around the new proposed tax rules and how they are going to impact our clients or even our own businesses. Check out this article, which provides a summary of business tax changes, and in the meantime, stay tuned!

Many banks unprepared for FASB's new credit loss standard (November 7, 2017) – Accounting Today (@AccountingToday)

The FASB’s new standard on accounting for credit losses will require some major changes for banks, particularly smaller ones, as well as many companies that provide loans. The current expected credit loss (CECL) standard requires companies to measure all of their expected credit losses for financial assets based on historical experience, current conditions, and reasonable and supportable forecasts. For SEC registrants, this standard is effective in 2020.

How It’s Relevant: The FASB doesn’t prescribe a specific method for calculating estimated credit losses, but it will require a detailed level of modeling and analysis. Larger banks have been performing “stress testing” due to stricter regulations, so those banks have a starting point. Unfortunately, for smaller banks, they will need to start from scratch. Although 2020 is a few years away, don’t wait to prepare! Whether it’s a 2-week "banking boot camp" for your new hires, or a 1-day Banking Update course, we’ve got you covered to ensure your personnel are knowledgeable of the latest developments affecting banks and other financial institutions, including CECL.

4 strategies for efficient, effective audit documentation (November 1, 2017) – Journal of Accountancy (@AICPA_JofA)

A recent AICPA study found that the most common audit issue is a lack of adequate documentation. This article discusses four best practices to help you comply with the AICPA’s AU-C Section 230, Audit Documentation, and to help you increase overall efficiencies. These best practices include: taking a smart approach to planning, embrace standardization, document now so you can save time later, and be prepared for what’s ahead.

How It’s Relevant: The key to these best practices is that documentation takes time, but if you put in the time, that investment will pay off! Having detailed documentation can help with inspections, and to help you remember something you might have performed six months ago. If you are looking for practical ways to improve the quality of your audit, including audit documentation, we are offering a new course, Improving Audit Quality. In the meantime, here is a link to AU-C Section 230, Audit Documentation, so you can brush up on your knowledge before busy season starts.


This post is published to spread the love of GAAP and provided for informational purposes only. Although we are CPAs and have made every effort to ensure the factual accuracy of the post as of the date it was published, we are not responsible for your ultimate compliance with accounting or auditing standards and you agree not to hold us responsible for such. In addition, we take no responsibility for updating old posts, but may do so from time to time.

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