This editorial piece by Tim Cook ran in the March 2, 2013, issue of the Indianapolis Business Journal.

In a time when state and local officials make economic development announcements every day, an increasingly common question is, “How does this benefit me?”

For the company receiving incentives, that answer is easy enough; whether it be tax credits or a training grant, they receive some form of financial support. But, what about state and local government, and the public at large—what’s in it for them?

As this question comes up more and more, state and local governments have sought to better quantify the benefits of these deals and portray this benefit to the public. This evolution is a good thing for everyone affected by the process.

Some benefits are easy to quantify. Each job created can be counted. Everyone agrees that the creation of jobs benefits the economy. And for each job created, a certain amount in state and local income tax will be generated.

When a company buys equipment, it will pay state sales tax. There will also be property tax expense on the company’s real estate, regardless of whether it leases or owns the building.

These taxes add up to a total amount that can be tangibly identified.

Beyond the simple adding and subtracting of tax benefits, state and local governments are able to estimate payoff on economic development projects in a more macro fashion. They do this in a lot of ways.

Many communities subscribe to software programs that estimate total economic impact of these projects, or they may pay a third-party economist to do the analysis.

These resources project spending, jobs, tax dollars and other positive economic impacts that a new project will support and create.

Some localities have begun to ask more specific questions about where current and future employees reside, as this affects local income taxes allocated to communities.

Some units of government take it a step further, actually seeking to tie incentives to the local income tax the company withholds from employees, similar to what the state has done with its job creation tax credit for many years to ensure the incentives are performance-based and self-policing.

Other benefits may include a project’s serving as an impetus to a dormant redevelopment area, or expanding a community’s or state’s penetration within a particular industry. Some projects also may have a multiplier effect, serving as anchors or attracting suppliers and related businesses within a given proximity.

Then there is the question of civic involvement by the company. Companies often will be asked how they intend to interact with and give back to the community at large. More and more, localities are seeking specific commitments, whether participating in the United Way, joining the local chamber of commerce or sponsoring a summer internship program through a local community college.

These softer forms of public-private partnerships can be dismissed as too touchy-feely, but the fact is that such involvement can be vitally important for the long-term good of a community and its efforts to promote a better quality of life.

A prime example of this was the fundraising initiative by area businesses to land the 2012 Super Bowl. The corporate philanthropic spirit that intervened to support this effort was rooted in a public-private partnership model that includes groundwork laid by a strong economic development infrastructure.

By fostering this sense of civic readiness in companies, whether it be in recognition of economic development support for a project or just general interaction with like-minded businesses, central Indiana strengthens its foundation for similar future successes.

In recent years, some economic development deals have become more complex, employing less-often-used incentives like tax increment finance and similar bond devices. As a deal increases in complexity, the level of scrutiny increases with it, and that, too, is a good thing.

These tools will continue to play a positive role in the economy only if they consistently produce winning projects and provide reliable security to state and local government for the incentives they employ.

Economic development deals need to pay for themselves as well as provide the opportunity for greater benefits to come. The better job that company officials and officeholders do in educating the public about the return on investment potential of these deals, the more equipped the public will be to appreciate the need to promote support for economic development projects in their communities.

Tim Cook is the partner in charge of Katz Sapper & Miller’s State and Local Tax Practice. Views expressed here are the author’s.

Indiana Tornado Victims Assistance:  The Indiana Department of Revenue (IDOR) has provided answers to potential questions from individual and business taxpayers in counties affected by recent tornados. Taxpayer issues addressed include return filing and refunds, lost records, payment coupons and registered retail merchant certificates, and obtaining a copy of a state return to verify income. The IDOR will make every effort to work with business taxpayers that live in an area affected by severe weather and that are unable to make payment on their bills at this time in coming to a reasonable agreement for payment on a case by case basis. Contact the IDOR at 317.233.5212 to discuss with an IDOR representative.

Louisiana No Longer Accepts Federal Extension: Effective March 20, 2012, the Louisiana Department of Revenue (LDR) adopted emergency amendments to an administrative rule that govern the procedure for obtaining individual income tax return filing extensions, and corporation income and franchise tax return filing extensions. The amended rules provide that taxpayers seeking to obtain a return filing extension must request the extension by submitting a paper copy or an electronic application. The LDR no longer accepts a federal extension to file as an extension to file the Louisiana tax return. This change applies to tax returns due on or after January 1, 2012.

Nebraska Issues Guidance for Construction Contractors: The Nebraska Department of Revenue (NDR) has released a presentation on taxes for construction contractors that has been prepared by the NDR staff. The presentation: (1) provides an overview of sales and use tax laws; (2) discusses the contractor database that is used for purposes of determining whether taxes must be withheld from contractors; (3) discusses sharing of information between the Department of Labor and the NDR for purposes of determining whether persons hired are contractors or employees; (4) explains the terms “construction contractors,” “contractor labor,” “building materials” and “fixtures”; (5) explains the taxability of transactions for Option 1, Option 2 and Option 3 contractors; (6) discusses the taxability of contracts with exempt entities; (7) explains the taxability of building materials and fixtures that are used on job sites outside Nebraska; and (8) explains the taxability of the repair or annexation of exempt manufacturing machinery and equipment. See the Fact Sheet for more information.

Texas to Offer Amnesty Program:  Texas has announced Project Fresh Start, a limited tax amnesty program under which penalties and interest will be waived for taxpayers that file delinquent tax reports and pay all taxes due, or amend reports that underreported taxes and pay the taxes due. Reports originally due before April 1, 2012, are eligible for the program. The amnesty period runs from June 12 through August 17, 2012. For details on eligibility and the application procedure, see http://freshstart.texas.gov/.

Idaho Updates Guidance Regarding Sales Tax on Interstate Vehicles – Effective 7/1/12, HB 361 provides that, in the context of the tax exemption for motor vehicles and trailers substantially used in interstate commerce and registered under the International Registration Plan (IRP), “substantially used in interstate commerce” means that the vehicle or trailer is operated in a fleet that logs at least 10% of its fleet miles outside of Idaho in the four fiscal quarters beginning July 1 and ending June 30 of each year (previously, in an annual registration period) under the IRP. If such motor vehicle or trailer is not substantially used in interstate commerce during the four fiscal year quarters beginning July 1 and ending June 30 of each year (previously, during an annual registration period), it is deemed to be used in Idaho and it is subject to the Idaho use tax.

Illinois Issues Ruling on Independent Contractor and Nexus - The Illinois Department of Revenue determined that a taxpayer's contracting sales of services in Illinois on a regular basis would “likely” subject the taxpayer to Illinois income taxation. The taxpayer operates a 24/7 call center for national retailers with multi-site locations. The business consists of coordinating contracted labor on an as-needed basis for its national customers, some of them located in Illinois. The “contracted” work is done by independent contractors as the taxpayer does not have payroll, inventory, personal property or a physical presence in Illinois. However, Ill. Admin. Code 86 § 100.9720(c)(6) provides that the use of independent contractors may only afford a nonresident immunity from taxation for “limited activities.” The IL DOR indicated that the fact that the taxpayer's business is entirely set up around using independent contractors on a regular basis may jeopardize the protections otherwise afforded. See IT 12-0001-GIL for details.

 

Indiana Use Tax Not Due on Promotional Items: An Indiana corporation was not liable for use tax on items it manufactured and pulled from its inventory in Indiana for use as promotional items in other states because the items were only temporarily stored in Indiana for subsequent use outside Indiana. The items were consumed in the course of demonstrations at non-Indiana locations. The products did not return to Indiana. This is temporary storage for use outside Indiana and does not constitute storage subject to Indiana use tax. See LOF 04-20110134 for more information.

Connecticut To Issue Debit Cards for Refunds: The CT Department of Revenue Services will issue personal income tax refunds in the form of debit cards, rather than checks, to taxpayers who do not use direct deposit. DRS has contracted with JP Morgan Chase to administer the debit card program. Taxpayers will have to call Chase to activate the card and select a PIN. The debit card can be used at ATMs; banks and credit unions displaying the VISA logo; gas stations and retail locations that accept VISA. If the taxpayer does not activate the debit card within 365 days, the debit card account will be closed and the available balance will be returned to DRS. If the debit card is activated and a balance remains, after the 12th consecutive month of inactivity (365 consecutive days of inactivity), Chase will begin charging an inactivity fee of $1.00 per month. Visit the FAQs for more information on the program.

Kentucky Requires Estimates of Nonresident Withholding for 2012: Effective for taxable years beginning after December 31, 2011, every pass-through entity required to withhold Kentucky income tax will be required to make a declaration and pay estimated tax if : (1) the nonresident individual owner's tax liability can reasonably be expected to exceed $500; and/or (2) a corporate owner doing business in Kentucky only through its ownership interest in a pass-through entity has a tax liability that can reasonably be expected to exceed $5,000. When withholding on the distributable share income of nonresident individuals, estates, trusts and corporations, no withholding is made for partners or members that are pass-through entities. The distributive share income will continue to pass through as Kentucky source income requiring withholding at each level of each pass-through entity of multiple tier structures. Therefore, withholding, as well as the calculation to determine if an entity is required to make declaration payments, will be at each level of the structure using only the nonresident individual and corporations doing business in Kentucky only through their ownership interest in the pass-through entity. Trusts and estates are entities treated as individuals and are included in the withholding requirement. See KY Tax Alert 1 for additional information.

Indiana Updates Sales Tax Guidance for Colleges and Universities:  The IDOR has revised Information Bulletin 68 concerning nonprofit and state colleges and universities to include separate sales tax treatment for colleges and universities that operate as nonprofit organizations and those that operate as governmental agencies. Indiana state colleges and universities that are nonprofit organizations or governmental agencies are entitled to certain exemptions from sales and use tax for purchases and sales that support the exempt government function or educational mission of the institutions. Transactions that do not support the exempt educational mission of a nonprofit educational institution or that are associated with a proprietary activity on the part of a state government educational institution are subject to tax. The bulletin details: purchases and sales by nonprofit colleges and universities; purchases and sales by state colleges and universities; application of the key terms “educational materials,” “proprietary activity,” “accommodations,” and “student”; furnishing or selling intrastate telecommunication services; and student organizations at state colleges and universities.

Missouri Upholds Use Tax on Repair Parts: The MO Sup Ct. held that a company that provides maintenance and repair services for mainframe computers is liable for use tax on parts it purchased and used in fulfilling maintenance contracts because it engaged in taxable use in MO. The company did not just store the parts temporarily in MO, but unpacked, inspected, tested, and repackaged the parts then certified them for use and shipped them to its customers. Further, it was not entitled to resale exemption because it did not purchase the parts for subsequent taxable sale. For more information, see Custom Hardware Engineering & Consulting Inc. v. Director of Revenue.

Indiana and Amazon Agree on Tax Collection
Indiana Governor Mitch Daniels has announced that amazon.com will begin collecting Indiana sales tax on Internet purchases under an agreement reached between Amazon and the IDOR. Amazon will voluntarily begin to collect and remit Indiana sales tax beginning Jan. 1, 2014, or 90 days from the enactment of federal legislation, whichever is earlier. Indiana will not assess the company for sales tax for other periods. See the governor's news release for additional details.

Michigan Amends Apportionment Calculation
Effective Jan. 1, 2012, the Michigan sales factor numerator of a corporate taxpayer must include its proportionate share of the total sales in Michigan of a flow-through entity that is unitary with the taxpayer. The denominator of a taxpayer must include its proportionate share of the total sales everywhere of a flow-through entity that is unitary with the taxpayer. A flow-through entity is unitary with a taxpayer when that taxpayer owns or controls, directly or indirectly, more than 50 percent of the ownership interests with voting rights or ownership interests that confer comparable rights to voting rights of the flow-through entity, and that has business activities or operations which result in a flow of value between the taxpayer and the flow-through entity, or between the flow-through entity and another flow-through entity unitary with the taxpayer, or has business activities or operations that are integrated with, are dependent upon, or contribute to each other. Sales between a taxpayer and flow-through entities unitary with that taxpayer, or between flow-through entities unitary with a taxpayer, must be eliminated in calculating the sales factor. See SB 673 for details of the new law.

Michigan to Follow Federal Classification for Disregarded Entities
Effective retroactive for taxes levied on and after Jan. 1, 2008, Michigan law has been amended to provide that a person that is a disregarded entity for federal income tax purposes under the Internal Revenue Code must be classified as a disregarded entity for purposes of the MBT. This legislation negates the requirement outlined in Notice to Taxpayers Regarding Federally Disregarded Entities for entities to amend prior year MBT returns to separate activities of disregarded entities resulting from the Kmart decision. See SB 369 for additional information.

The Department of Labor (DOL) is intensifying its audit initiatives for employee benefit plans (both retirement plans and health and welfare plans). DOL has two primary initiatives. First, DOL targets and selects plans based on its own internal criteria which it does not share with the public. Second, DOL selects audits performed on "large" plans with over 100 participants and "audits the auditor" by examining the workpapers of the audit firm who performed the audit.

In either case, DOL may reject a Form 5500 filing found to be incomplete or inadequate. Penalties can be as high as $1,100 per day (capped at $50,000).

Plan Administrators need to be diligent in selecting an auditor for their benefit plan audits who adheres to the highest standards of quality and has considerable experience auditing employee benefit plans. The audit firm should be a member in good standing of the AICPA Employee Benefit Plan Audit Quality Ceneter.

In order to monitor the outcome of an employee benefit audit, the Plan Administrator should ask the auditor:

• Whether plan assets are reported at fair value;
• Whether contributions were made completely and in a timely manner;
• Whether benefit payments were made in accordance with plan provisions;
• Whether assets have been properly allocated to participant accounts;
• Whether the tax status of the plan has been compromised; and
• Whether any transactions prohibited under ERISA were noted.

A quality audit of an employee benefit plan is in the best interests of plan participants and fulfills a fiduciary obligation of the Plan Sponsor.

The state of Indiana recently released new legislation that entitles an individual tax deduction for up to $1,000 per dependent child for unreimbursed education expenditures. These expenditures include costs for tuition, fees, software, textbooks and school supplies for dependent children in grades K-12 enrolled in private school or who are homeschooled. This legislation is retroactive for year 2011 so the deduction can be made on the parent’s 2011 tax return.
 
For more information on this deduction, please see the information bulletin released by the Indiana Department of Revenue or contact your KSM advisor.

 

• A majority of Indiana's manufacturers reported "healthy" or "stable" financial performance over the past two years. Equally encouraging, the waves of cost-cutting in recent years by manufacturers now appear to be rapidly receding, with less than 25 percent of survey respondents reporting cost-cutting as their strategy for future financial success. Additionally, 60 percent of Hoosier manufacturers reported that they are now increasing investments across the business and in areas essential for revenue growth.
• When asked about future financial priorities, the top three goals of Indiana manufacturers are: 1) improving cash flow and working capital management; 2) improving short- and long-term operational efficiencies; and 3) accessing credit for working capital. All of these strategies are designed to not only improve financial health but also help ensure survival in today's demanding business environment.
• In terms of job growth for 2011 and beyond, 11 percent of survey respondents plan to open new manufacturing facilities in the next two years. Of those respondents, all favored Indiana over other locations due to Indiana's workforce, central U.S. location and transportation network. Just as encouraging, 13 percent of respondents reported that they anticipate relocating or "onshoring" some manufacturing back to America in the next several years. Chief among those reasons cited were obtaining better control over production, closer proximity to major customers and markets, and reduced total "landed" costs.

• Crafting a business strategy that features superior design and delivery for new products as well as outstanding customer service for more mature goods.
• Picking a path in terms of manufacturing improvement. The strongest strategies are those featuring either advanced smart manufacturing technologies or process improvements (or both).
• Leveraging upstream suppliers and downstream customers in the supply chain. Since no manufacturing company operates in a vacuum, manufacturers working together with their customers, suppliers and transportation providers reported significantly better performance versus those that do not.

The Internal Revenue Service recently announced the annual Cost-of-Living Adjustments (COLA) for retirement plans and related limitations for the 2012 tax year. Several of the following limits have changed for 2012 compared to the 2011 limits.

For questions regarding your retirement plan, please contact any of the members of our Employee Benefit Plan Services Group.

The state of Indiana has updated Information Bulletin 11 to reflect its current policy on sales tax exemptions afforded to nonprofits and government entities. To qualify for the exemption, purchases made by nonprofit organizations as well as federal, state, and local government entities must be invoiced directly to and paid directly by the exempt nonprofit or government entity.

In September 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-08, Intangibles-Goodwill and Other (Topic 350), to provide for a qualitative approach in testing goodwill for impairment. The update was driven by concerns expressed by privately held companies that the existing two-step goodwill impairment test was both costly and complex.

The two-step process for calculating goodwill impairment continues to exist within Topic 350. Step One of the test is to calculate the fair value of the reporting unit and compare the calculated results to the carrying amount of the reporting unit, including goodwill. If the fair value of the reporting unit is less than the carrying amount of the reporting unit, then Step Two of the test is completed to determine the amount of the impairment loss, if any.

The amendments to Topic 350 now provide for a qualitative assessment before completing Step One of the previously existing impairment test. An entity now has the option to first assess qualitative factors to determine whether the existence of events and circumstances results in a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Examples of events and circumstances include the following:

• Macroeconomic conditions
• Industry and market conditions
• Cost factors with a negative effect on earnings and cash flows
• Overall financial performance

You never know what you have until it is gone. Given the volatile nature of national politics, many taxpayer-friendly provisions that are scheduled to sunset at the end of the year may either be allowed to expire or reinstituted with less favorable terms. With uncertainty in the air, taxpayers may wish to take advantage of programs by accelerating purchases, hiring, and making other business decisions.

Below are nine tax provisions that may sunset Dec. 31, 2011:

100 Percent Bonus Depreciation
Bonus depreciation allows for accelerated depreciation of certain qualified property. The 100 percent bonus depreciation allowance was written to apply to property that was placed in service between the dates of Sept. 9, 2010, and Dec. 31, 2011. The bonus depreciation allowance will be reduced to 50 percent beginning Jan. 1, 2012.

15-Year Depreciation for Certain Realty Assets
For a limited time, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property were able to be depreciated over a 15-year term. For assets placed in service after Dec. 31, 2011, the depreciation period will be pushed back to 39 years.

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) (the Boards) jointly issued exposure drafts, Leases, on Aug. 17, 2010, which addressed accounting for leases by both the lessee and lessor. Since that date, the Boards have continued to discuss leases and have reached additional tentative decisions on lessee and lessor lease accounting.

The Boards’ objective of the lease project is to not only create common lease accounting requirements to ensure leases are recognized on the balance sheet, but also provide users of financial statements with useful and complete information about an entity’s leasing transactions. Lease transactions are widely used as a financing tool in today’s marketplace and have a major impact on the construction and real estate industries. The proposed changes will alter how both users of the financial statements and companies view lease transactions.

View Katz, Sapper & Miller’s Construction and Real Estate Industry Advisor to read more about the approach the exposure draft lays out for lessees to account for lease transactions.

Small nonprofit organizations may be eligible for a tax credit for health insurance premiums paid for tax years beginning in 2010. For tax-exempt small employers, the credit is 25 percent of employer paid premiums, is limited to the amount of certain payroll taxes paid, is limited to the state average premium chart, and cannot exceed the amount of payroll taxes for the organization.
A nonprofit is an eligible small employer if it meets the following requirements:

• Paid at least 50 percent of the premiums for employee health insurance coverage
• Had fewer than 25 full-time equivalent employees (FTE) for the tax year
• Paid average annual wages for the tax year of less than $50,000 per FTE
• Tax-exempt credit requirement: The organization must be described under Section 501(c)

Examples of qualifying health insurance coverage are as follows: medical care, dental plans, vision plans, nursing home plans, and home health care plans. Examples of coverage not allowed in calculation of the credit are as follows: workers' compensation, automobile medical payment insurance, coverage for on-site medical clinics, and liability insurance.

The credit is claimed as a refundable credit on Form 990-T, Exempt Organization Business Income Tax Return.

On June 21, 2011, the Internal Revenue Service (IRS) released the new 2009 Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits, and its instructions. The new form replaces the Schedule SSA, which was previously filed with the Form 5500.

The new Form 8955-SSA is intended to be used to report information about plan separated participants with deferred vested including those that:

• have separated from service;
• were reported as a deferred vested participant on another plan's filing if his or her benefits
• were transferred (other than in a rollover) to the plan during the covered period;
• were previously reported under the plan but have been paid out or are no longer entitled to those deferred vested benefits; or were previously reported under the plan but whose information is being corrected.

Information reported on Form 8955-SSA is provided to the Social Security Administration (SSA). The SSA provides the information to participants when they file for Social Security benefits.

The general filing due date is the last day of the seventh month following the last day of the plan year, plus extensions (similar to the annual Form 5500). However, the due date for filing the 2009 and 2010 Form 8955-SSA is the later of January 17, 2012 or the due date of the 2010 form. Information for the 2009 and 2010 plan years can be combined on one form.

Plan administrators must file Form 8955-SSA with the IRS and not through the EFAST2 filing system. EFAST2 filings are posted on the Internet and the Form 8955-SSA includes Social Security numbers. Due to privacy concerns, sensitive participant information cannot be posted on the Internet.

Note that the Form 8955-SSA is not required to be filed for a plan year if there is no information to report.

A number of states provide a variety of sales and use tax exemptions to Interstate Motor Carriers (IMCs). The types of exemptions vary from state to state, but generally apply to the acquisition of tangible personal property used by IMCs in transportation operations. Common exemptions include the purchase and lease of rolling stock (tractors and trailers), repair parts for exempt rolling stock, property that becomes part of rolling stock (GPS type devices), and fuel.

Read the full text of our Truck Times newsletter.

The Financial Accounting Standards Board (FASB) has issued new guidance for how companies must present other comprehensive income (OCI) and its components in their financial statements. The guidance applies to all companies that report items of OCI but perhaps is most relevant for companies that have historically presented components of OCI as part of their statement of changes in stockholders’ equity, an option that is no longer available under this guidance.

ASU 2011-05
The new guidance, found in Accounting Standards Update (ASU) 2011-05, Presentation of Comprehensive Income, is intended to increase the prominence of items that are recorded in OCI and improve comparability and transparency in financial statements. The guidance should make it easier for users of financial statements to evaluate the effect of OCI on a company’s overall performance.

The new guidance described in ASU 2011-05 will supersede the presentation options in Topic 220 (previously known as Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income). The guidance, however, affects only the presentation of OCI, not the components that must be reported in OCI.

Comprehensive Income Presentation Standards
Both U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) require financial statements to present comprehensive income (CI) in two parts:

1. Net income and its components, such as income from continuing operations, discontinued operations and extraordinary items, and
2. OCI and its components.

CI measures all of a company’s changes in equity that result from “nonowner changes.” Therefore, it captures all recognized transactions and other economic events that affect equity in a period, except transactions with the company’s owners, like investments by owners or distributions to owners. According to FASB, even though CI is a “useful measure,” information about the components of CI can reveal significantly more than the total amount of CI does.

OCI includes all of the components of CI that are not recorded directly on the income statement as a component of net income. Examples include:

• Foreign currency translation adjustments
• Unrealized holding gains and losses on available-for-sale securities
• Unrealized holding gains and losses that result from a debt security being transferred into the available-for-sale category from the held-to-maturity category
• Gains and losses relating to pensions and other postretirement benefits
• Prior service costs or credits associated with pension or other postretirement benefits

Even companies that do not have any of the above items need to be aware of the new guidance. FASB has indicated that other potential upcoming accounting standard changes likely will mean more items must be presented as OCI in the future.

New Alternatives for Presenting OCI
Until now, U.S. GAAP gave companies three alternatives for presenting their OCI:

1. As part of the income statement, below net income and listing the various OCI components, to arrive at CI,
2. In a separate statement (“statement of comprehensive income”), which begins with net income and then lists the various OCI components, to arrive at CI, or
3. As part of the statement of stockholders’ equity, in a column titled “Accumulated OCI,” which totals all OCI amounts recorded.

FASB’s new guidance requires companies to present OCI in one of two ways. The first option is to present OCI in a single continuous statement of comprehensive income that lists the components of net income and total net income, the components of OCI and total OCI, and the total of CI.

Alternatively, a company can take a two-statement approach. An income statement must present the components of net income and total net income, and a statement of OCI, immediately following the income statement, must present the components of OCI, a total for OCI and a total for CI. The second statement may begin with net income.

Regardless of the option selected, companies no longer can present adjustments for items reclassified from OCI to net income in their footnotes. They must present the adjustments on the face of the financial statements where the components of net income and OCI are presented, and corresponding adjustments must appear in both net income and OCI.

The idea is to avoid the double counting of items in both net income and OCI. For example, a company might realize gains from investment securities and include them in net income in the current period. An adjustment is necessary because the gains were already included in OCI as unrealized holding gains in that period or earlier periods. The company must deduct the gains through OCI for the period in which they are included as net income so that they are accounted for only once.

As in the past, companies are free to present OCI components either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total OCI. The tax effect for each component must be disclosed in the financial statement notes or presented in the statement that presents OCI.

What about IFRS?
Like other recent changes to FASB’s accounting standards, the new guidance is designed to facilitate the convergence of U.S. GAAP with IFRS. But the changes do not completely converge the requirements for presenting OCI under the two sets of standards.

Differences remain over whether an item of income is initially reported in net income or OCI. Nonetheless, users of financial statements will now find it easier to compare statements of CI prepared under U.S. GAAP with those prepared under IFRS.

Effective Dates
The guidance in ASU 2011-05 takes effect for public companies during the interim and annual periods beginning after Dec. 15, 2011. It is effective for private companies for annual periods beginning after Dec. 15, 2012, and interim and annual periods thereafter. Early adoption is permitted.

Companies impacted by the guidance must apply it retrospectively for all periods presented in the financial statements.

Please contact your KSM advisor for more information.

To address the lack of fee transparency in the defined contribution market – 401(k), profit sharing and 403(b) plans – the Department of Labor (DOL) has taken the position that the plan sponsor, as a plan fiduciary, must understand how much is being paid for each service performed, that the services are appropriate, and that the amounts are reasonable.  

DOL Initiatives

In December 2007, the DOL proposed regulations under a three-pronged approach to enhance fee transparency relating to qualified retirement plans that have been, or will soon be, implemented. These three initiatives include:  

• An updated Form 5500 Schedule C (effective with the 2009 filing)
• Fee Disclosure by Service Providers to Plan Fiduciaries (effective Apr. 1, 2012)
• Fee Disclosures by the Plan Fiduciaries to Plan Participants (effective for the first plan year, beginning on, or after, Nov. 1, 2011) 

Most plan sponsors have already begun to comply with the first initiative by filing their 2009 Form 5500 Schedule C. Any plan service provider that received compensation from plan assets is required to disclose to the plan sponsor the amount and nature of service for which they are receiving compensation. The DOL will certainly take a much closer look at this information with the 2010 filings. 

The second initiative, under The Employee Retirement Income Security Act of 1974 (ERISA) 408(b)(2), requires covered service providers to give the plan fiduciary disclosures that outline all services to be provided and all compensation (direct, indirect, non-monetary, etc.) earned by the service provider and any affiliates and/or sub-contractors of the service provider. The fee disclosures must also reflect the fiduciary status of the provider, fees related to the termination of their services, a reasonable and good faith estimate of the plan’s recordkeeping costs, and expense information relating to the plan’s investment alternatives (expense ratios, sales charges, redemption fees, wrap fees, etc.). 

The final initiative addresses the DOL’s concern that participants are not provided with the necessary information to make informed decisions about their plan’s investment choices. Effective Jan. 1, 2012 for a calendar year-end plan, plan sponsors, under ERISA 404(a)(5), must now furnish annual and quarterly disclosures to all participants in participant-directed plans. The disclosures must include Plan-Related Information, such as:

• general information about the plan’s investment options;
• administrative expense information (plan level fees); and
• individual expense information (individual transaction-based fees).   

Additionally, the disclosures must include Investment-Related Information, such as:

• performance data;
• benchmarking information;
• fee and expense information;
• an Internet website address; and
• a glossary to assist participants with investment terminology. 

Fiduciary Responsibility

ERISA requires that plan fiduciaries, when selecting and monitoring service providers and plan investments, act prudently and solely in the interest of the plan’s participants and beneficiaries. A major responsibility of a plan fiduciary is to ensure that the plan’s fee arrangements with its service providers are “reasonable,” and that only “reasonable” compensation is paid out of plan assets for services provided to the plan. Several recent court cases have focused on this “reasonable” standard with mixed results for plan sponsors. 

How Should a Plan Fiduciary Prepare?

As a plan sponsor and as the plan fiduciary, the following actions are recommended to comply with the new fee disclosures requirements:

• identify service providers;
• determine all applicable fees to which the plan is subject to;
• analyze the fees for reasonableness;
• document the process and the reached conclusions;
• discuss the expected timing, method and compliance of the disclosure requirements with services providers;
• communicate the plan fees with participants; and
• establish a process to periodically review service provider agreements for performance. 

Taking the above steps may prevent having to answer some tough questions from plan participants once they receive their first quarterly statement in 2012 and are made aware of possible fee charges to their individual accounts. Let the rising and falling of gas prices keep the headlines, not the company’s 401(k) plan costs.

The Indiana Gaming Commission recently implemented changes to charity gaming legislation. SEA 340-2011 included the expansion of the use of credit cards at an allowable event. Effective July 1, 2011, organizations may not accept credit cards or extend credit to a player for the purchase of a chance to play in a game of chance during an allowable event or for the purchase of licensed supply. However, a qualified organization is permitted to accept credit cards for the non-gaming portions of an allowable event; such as the purchase of food, beverages, merchandise, and retail goods and services offered at a benefit auction.

In addition, the legislation allows for the use of a volunteer ticket agent, removes related activities from the inclusion in gross revenue to determine license fees, and increases the number of days a qualified organization may hold a festival.