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Year-End Planning for Charitable Remainder Trusts and the 3.8% Net Investment

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Charitable remainder trusts (CRTs) might want to sell appreciated property before year-end to realize long-term capital gains in 2012 versus a later tax year. CRTs are generally not tax-paying entities. However, distributions from CRTs to CRT beneficiaries are taxable to beneficiaries to the extent of the CRT's current and accumulated income. If a CRT does not distribute all of its current income to the beneficiary, the excess is accounted for by the CRT as accumulated income and not currently taxed.

Distributions from CRTs to CRT beneficiaries may also be subject to the 3.8% surtax on net investment income (NII) for income realized in 2013 and later years. NII of a CRT beneficiary is the lesser of CRT distributions or the current and accumulated (after 2012) NII of the CRT. Income realized by a CRT in 2012 is not subject to the surtax, even if it is distributed to the CRT beneficiary after 2012. However, distributions of accumulated CRT income consist of post-2012 accumulated income first, and pre-2013 accumulated income second, for purposes of determining what income is NII and potentially subject to the surtax.

A CRT should wait until after 2012 to sell assets at a loss. Whether a CRT should sell appreciated assets before year-end depends on all of the facts and circumstances, such as the likelihood of the CRT beneficiary being subject to the 3.8% surtax. The surtax applies to joint filers with income over $250,000 or single filers with income over $200,000.

Contact your KSM advisor for more information.


Survey Finds Indiana’s Manufacturers Ready to Compete

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Indianapolis, Ind. – The certified public accounting firm of Katz, Sapper & Miller LLP today released the results of their annual Indiana manufacturing survey. This study of small- to medium-size manufacturing companies was commissioned by Katz, Sapper & Miller and developed in partnership with Indiana University's Kelley School of Business – Indianapolis, Conexus Indiana, and the Indiana Manufacturers Association.

The results from this year’s survey, 2012 Indiana Manufacturing Survey: “Halftime” for Indiana Manufacturing, indicate that Hoosier manufacturers are stronger this year than at any point since the Great Recession, and are well positioned to compete in the coming years.

“Fundamental changes are continuing to take place across manufacturing in all kinds of capabilities,” said Scott Brown, partner-in-charge of Katz, Sapper & Miller’s Manufacturing and Distribution Services Group. “Businesses are starting to invest for growth, including facilities and automation, with an eye toward providing customers increasing quality at lower prices. While many Hoosier manufacturers have managed to survive the effects of the recession, challenges remain. Of course, not all manufacturers have found the perfect winning strategy, but many are heading in the right direction and some are excelling during these challenging times."

Other key findings reveal:

  • Hoosier manufacturers have largely shaken off the effects of the Great Recession and have stabilized their businesses. A significant majority of Indiana's manufacturers now report that their business is either "healthy" or "stable” with tougher times behind them.
  • Survey results indicate that the past's relentless rounds of downsizing are over, and while that approach worked well when mere survival was paramount, it is hardly a winning strategy for the future.
  • Many Hoosier manufacturers now recognize that the winning strategy is targeted investment aimed at growth. Over 70% of respondents reported that their goals were increasing investment in areas either essential for revenue growth, or across the entire business.
  • Indiana remains well positioned to lead American manufacturing. Hoosier manufacturers are highly competitive in a broad variety of industries and products, and, in fact, one in 10 of the companies in this survey are planning to open a new facility in Indiana in the near future.
  • A significant number of respondents report that they are onshoring manufacturing back to the United States. Indiana’s competitive advantage remains the fact that nowhere else in America allows manufacturers to position themselves closer to their customers and markets, or offers greater advantages in terms of suppliers, workforce quality, and transportation.
  • Successful manufacturers are continuing to rely on process improvement programs such as "Lean" and "Six Sigma" for implementing change, as well as increasingly taking advantage of advanced automation or smart manufacturing technologies to remain competitive.

Download the complete results of the 2012 Indiana Manufacturing Survey: “Halftime” for Indiana Manufacturing.


About Katz, Sapper & Miller
As one of the top 100 CPA firms in the nation, Katz, Sapper & Miller has earned a reputation as a leader in the areas of accounting, tax and consulting services. Founded in 1942, the firm has more than 250 employees and is headquartered in Indianapolis, Ind. Katz, Sapper & Miller was named one of the “Best of the Best” accounting firms in the nation by INSIDE Public Accounting magazine and has been recognized by the Indiana Chamber of Commerce as one of the “Best Places to Work in Indiana” for seven consecutive years. The firm is an independent member of Nexia International, a leading global organization of independent accounting and consulting firms. Learn more at

About the Kelley School of Business – Indianapolis
The IU Kelley School of Business has been a leader in American business education for more than 90 years. With an enrollment of more than 5,700 undergraduate and nearly 2,200 graduate students across two campuses, it is among the premier business schools in the country. Kelley’s Indianapolis campus, based at IUPUI, is home to the school’s Evening MBA, Master of Science in Accounting, and Master of Science in Taxation programs and a full-time undergraduate program. The part-time Evening MBA program is ranked ninth in the country by U.S. News and World Report. Learn more at

About Conexus Indiana
Launched by the Central Indiana Corporate Partnership, Conexus Indiana is the state's advanced manufacturing and logistics initiative, dedicated to making Indiana a global leader. Conexus is focused on strategic priorities like workforce development, creating new industry partnerships and promoting Indiana's advantages in manufacturing and logistics. Learn more at

About the Indiana Manufacturers Association
Formed in 1901, the Indiana Manufacturers Association is the second oldest manufacturers association in the country and the only trade association in Indiana that exclusively focuses on manufacturing. The Indiana Manufacturers Association is dedicated to advocating for a business climate that creates, protects, and promotes quality manufacturing jobs in Indiana. Indiana is one of the top manufacturing states in America in the wealth and jobs created, sustained, and supported. More than 50 percent of all employment in Indiana has some connection to manufacturing.

The staff of the Indiana Manufacturers Association has more than 160 years of combined governmental affairs experience and is recognized as experts in many areas, including tax, environment, labor relations, human resources, and healthcare. Learn more at


IRS Now Requesting and Examining Donor Acknowledgment Letters

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With the end of the year fast approaching, many organizations will be documenting contributions from their donors. In order for the donor to deduct the contribution, especially for contributions of $250 or more, documentation must be retained. The donor will require an acknowledgment letter from the organization. The Internal Revenue Service (IRS) is starting to request and examine these acknowledgment letters when auditing tax returns. Specifically, the IRS is looking for the language relating to any goods or services provided by the organization as well as substantiation of the actual donation.

For example, in Durden v. Commissioner, the taxpayer received an acknowledgment letter from their church that omitted the language related to goods and services provided. The IRS disallowed the taxpayer to receive credit for their contributions to the church stating that the acknowledgment letter received did not meet the criteria set forth in the statute.

For an acknowledgment letter to be considered valid, the following details must be included:

  1. The amount of cash and a description of property (but not the value) of any property other than cash contributed,
  2. Whether the organization provided any goods or services in consideration for the contribution, and
  3. A description and good faith estimate of the value of goods or services referred to in #2 above, or if such goods and services consist solely of intangible religious benefits, a statement to that effect.

For more information, contact your KSM advisor.


IRS Announces 2013 Cost-of-Living Adjustments

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The IRS has announced the 2013 cost-of-living adjustments (COLAs) for retirement plans. Many of the limits pertaining to pension and other retirement plans are changed for 2013. Significant changes are as follows:

Elective Deferrals: The dollar limit for Section 401(k) plans, Section 403(b) plans and most 457 plans increase to $17,500 (up from $17,000), or $23,000 if over 50 and the plan adopts catch-up provisioning.

Defined Benefit Plan: The limitation on the annual benefit under a defined benefit plan is increased to $205,000 (up from $200,000). Plan provisions must preclude the possibility that any annual benefit that exceeds the limitations will be payable at any time. Further, the plan provisions (including the provisions of any annuity) generally must preclude the possibility that any annual benefit exceeding these limitations will be accrued, distributed, or otherwise payable in any optional form of benefit (including the normal form of benefit) at any time from the plan.

Annual Compensation Limit: The maximum amount of annual compensation that can be taken into account for various qualified plan purposes is increased to $255,000 (up from $250,000). For example, if an employer provides an annual contribution equal to 5% of salary under a qualified plan, an employee with a salary of $260,000 will have $12,750 contributed to his account ($255,000 * 5%).

Defined Contribution Plan: The limit on the annual additions to a participant's defined contribution account is increased to $51,000 (up from $50,000). The amount that can be allocated during a limitation year (typically the calendar year unless the plan provides otherwise) as an "annual addition" to a participant's account in a defined contribution plan is limited to the lesser of $51,000 or 100% of compensation.

IRA Contribution Limit: Increases to $5,500 (up from $5,000), or $6,500 if over 50 and the plan adopts catch-up provisioning. The due date for making a 2012 contribution is April 15, 2013. In order to make a contribution, the individual must have earned income and be under age 70 ½ at the end of the year.

SIMPLE Accounts: The maximum amount of compensation an employee may elect to defer for a SIMPLE plan is increased to $12,000 (up from $11,500), or $14,500 if over 50 and plan adopts catch-up provisions. An employer can either match employee elective deferrals dollar for dollar up to 3% of wages, or contribute 2% of wages (up to $255,000).


Standard Mileage Rates for 2013

The IRS has issued 2013 optional standard mileage rates used to calculate the deductible costs of operating automobile for business, charitable, medical or moving purposes. Beginning Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 56.5 cents per mile for business miles driven
  • 24 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

Year-End Planning: Old Strategies May Result in Higher Overall Tax Burdens

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With the re-election of President Obama and the Democratic majority retained in the Senate, it is now more likely that certain tax benefits and lower rates set to expire on Dec. 31, 2012 will expire or be adjusted for higher income taxpayers.

The benefits of certain tax deductions or strategies may also be curtailed for certain taxpayers after 2012 as Congress looks for ways to increase revenues with or without tax rate increases. Read more.

Read the full text of The Advisor newsletter.


State & Local Tax Update - 11/30/12

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Reassessment for Indiana Real Property Taxes: Indiana counties are currently wrapping up their 2012 statewide reassessments. During a reassessment year, county and township assessors are required to inspect all properties and adjust all assessed values to properly reflect market value in use. Counties were last required to reassess property in 2002; therefore, some property owners should expect significant changes as a result of the 2012 reassessment.

Property owners are encouraged to review their assessment notices (Form-11) as soon as they receive them to make sure the assessed value looks appropriate. The property owner has 45 days to file an appeal after the mailing of the first notice of assessment. When a property owner receives their tax bill, it is often too late to appeal the assessed value for that year. Some counties began mailing their assessment notices this month.

Contact your KSM advisor, or KSM property tax leader Chad Miller, as soon as you receive your Form-11. We would be happy to review the reassessed value of your commercial property to help you consider whether an appeal should be filed.


Indiana Updates County Income Tax Rate Notice: The Indiana Department of Revenue has updated its list of Indiana counties that have adopted county income taxes with resident and nonresident rate changes for Hancock County. The county income tax rates are effective for withholding purposes for periods beginning on or after Nov. 1, 2012. The rates apply to wages paid after Oct. 31, 2012, and the tax is withheld and paid at the same time and in the same manner as the state income tax. While this list is intended for those counties whose income tax rates are changed and effective Nov. 1, 2012, counties can elect to change their rates on Dec. 1. See Departmental Notice #1 for details of the county rates.

Indiana Issues Guidance on Ice Removal Services: A company's sales of its lawn-care and snow-removal services, which included labor charges and salt applications to remove ice on the ground, were unitary transactions and therefore subject to sales tax. The company has two categories of customers: The first category of customers supply salt/sand and the company only provides labor, while the second category of customers do not supply salt/sand; rather, the latter pays the company to plow snow and also remove ice using the company's materials when needed. The customers who supply salt to the company paid for labor charges only, and therefore the services provided were not subject to sales tax. However, the customers in the second category were charged one price per visit for ice removal that included both labor and materials (salt). When a combined, single charge for material and labor is invoiced as one amount it is considered a unitary transaction that is subject to sales tax. See LOF 04-20120031 for details.

Indiana Issues Sales Tax Guidance on Trade-ins: A company selling recreational vehicles, travel trailers, and parts was not subject to gross retail tax on the trade-in allowance deductions provided to customers who traded in a travel trailer to purchase an RV, or when a customer traded in an RV to purchase a travel trailer. Ind. Code § 6-2.5-1-5(b) provides that gross retail income does not include that part of the gross receipts attributable to the value of any tangible personal property received in a like-kind exchange in the retail transaction. A like-kind exchange means a motor vehicle traded for another motor vehicle or a trailer traded for another trailer. An exception exists for transactions where a motorized recreational vehicle is traded in for a non-motorized recreational vehicle, as in the above instance. The Indiana Department of Revenue considers the motorized and non-motorized recreational vehicles to be like-kind and therefore exempt from gross retail tax. However, transactions where the company accepted a boat as a trade-in for a motor home or a travel trailer did not qualify for the like-kind exchange treatment and were subject to gross retail tax. See LOF 04-20120348 for details.

Illinois Rules on Taxability of Guaranteed Payments: The Illinois Department of Revenue ruled that a taxpayer owes Illinois income tax as a partner receiving guaranteed payments from a partnership doing business in Illinois during the 2010 tax year. The department noted that guaranteed payments received from the partnership are ordinary income, which was characterized by the partnership as business income. Therefore, the amount of the guaranteed payment that was apportioned to Illinois by the partnership is taxable to the taxpayer by Illinois and subject to withholding. The department further noted their decision to follow other courts in determining that a partner in a partnership doing business in Illinois has sufficient nexus with Illinois to be subject to Illinois income taxation. See GIL IT 12-0028 for details.

Pennsylvania Rules on Taxability of Pallets: The Pennsylvania Supreme Court has affirmed a Commonwealth Court opinion, holding that the rental of wooden pallets used to transport manufactured paper products from the factory to the warehouse is not subject to sales and use tax. The Commonwealth Court held that a "container," while not defined by statute or regulation, is generally a receptacle that holds things within it, where as a pallet is merely the floor of container that is created by adding cardboard sheets, posts and stretch wrap. The Board argued that the Pennsylvania Supreme Court determined that pallets were containers in Commw. v. Yorktowne Paper Mills, Inc. , 426 Pa 18, 231 A2d 287 (1967). However, the question in that case was whether the lumber, nails and metal bands used to contain the materials on pallets were taxable, and the state high court determined that the entire unit (pallet with metal bands securing the product) constituted a taxable container. In this case, the only question was whether the pallets by themselves are taxable as returnable containers, and the Commonwealth Court determined that they are not. See Procter & Gamble Paper Products Co. v. Commw., Pa. Commw. Ct., (Oct. 16, 2012) for more information.

Wisconsin Rules on Personal Liability for Sales/Use Tax: The circuit court upheld a decision of the Wisconsin Tax Appeals Commission, finding that an owner of a used car dealership was personally liable for the company's unpaid sales and use taxes. There was substantial evidence to find the owner was liable under Wis. Stat. § 77.60(9) because all three elements required for personal liability were met. The petitioner was an owner of the dealership, and he opened the company's checking account and was the sole signatory for that account. The owner's control over the business and the checking account was sufficient to show that he had the authority to pay the sales taxes. The petitioner also had keys to the business and held himself out as a manager of the dealership, and he was aware that sales taxes were due on cars sold by the dealership. His position as owner and manager, and his knowledge that taxes were due along with his ability to pay those taxes establishes that the petitioner had the duty to pay the sales taxes. See Marxer v. Wis. Dept. Rev., (Sept, 26, 2012) for details.

For more information, contact Donna Niesen at


Tax Court Validates Defined Value Clause for Interfamily Transfers

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In a big win for the taxpayer – and for estate and gift tax professionals – the Tax Court resoundingly rejected the Internal Revenue Service's (IRS) three arguments against defined value clauses, even in cases involving interfamily transfers. In its decision, the court also provided what amounts to a four-part "blueprint" for drafting successful formula clauses in the future. Read more

To read the full text of our Valuation Services Group newsletter, go here.


The ESOP Opportunity for Trucking Companies

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Trucking company owners can use Employee Stock Ownership Plans (ESOPs) as part of their succession planning strategy. As a tax-advantaged alternative to third-party sales, a sale to an ESOP should be considered by trucking company owners assessing their succession planning options.

ESOP Sale Alternative

Having key managers and employees take over operations when the owners retire is appealing. However, since many of these key employees have limited capital to fund a management buyout, using an ESOP as part of this buyout structure can make the transaction possible.

An ESOP can borrow funds to acquire company stock, thereby financing a buyout in a more tax-efficient manner, since the ESOP compensation expenses recorded for employees allows for repayment of loans with pre-tax dollars.

Benefits of Sale to an ESOP

Federal tax code contains provisions that favor the sale of company stock to an ESOP. Shareholders who sell to an ESOP can defer capital gains tax payments on their proceeds, when following the guidelines set forth under Section 1042 of the Internal Revenue Code.

Additional tax advantages for companies exist, most notably for Sub-S corporations. The Sub-S corporation ESOP is not taxable on its share of corporate earnings. The taxes are deferred until employees take distribution from the plan upon retirement, death, disability or termination.

An ESOP can lead to the development of an employee-ownership culture, one that empowers and rewards employees for their efforts, by demonstrating the financial benefits of ownership and sharing company performance data in a way that emphasizes how each work group contributes to success.

Considering the ESOP Option

Trucking company owners invest decades of effort to build the value in their businesses. A liquidity event will eventually occur to provide for their retirement and estate planning needs. When trucking company owners are considering their succession plan options, an ESOP should be among the opportunities they consider. The ESOP opportunity could offer the “win-win” alternative for both owners and their employees.

For more information, please contact Tim Almack, partner-in-charge of KSM’s Transportation Services Group.


IRS Guidance for Health FSAs

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Starting in 2013, there are new rules about the amount that can be contributed to health flexible spending arrangements (FSAs). Notice 2012-40 provides information about the new rules and flexibility for employers applying the new rules, and requests comments about other possible administrative changes to the rules on FSA contributions. In the Notice, the Internal Revenue Service (IRS) has provided clarity on how to implement the upcoming $2,500 limit on salary reduction contributions to health FSAs set by the Patient Protection and Affordable Care Act (PPACA).

The Notice, which was issued by the IRS on May 30, 2012, also provides the deadline (before the end of the 2014 plan year) for amending cafeteria plans to reflect this new limit. The Treasury Department and the IRS are considering modifying the “use-it-or-lose-it” rule that has long troubled health FSA participants.


The PPACA affects health FSAs by adding Internal Revenue Code Section 125(i), which stipulates a $2,500 limit on salary reduction contributions to health FSAs effective for taxable years beginning after Dec. 31, 2012. The $2,500 limit will be indexed for inflation in future years. Through 2012, employees could establish their own limits as long as the limits were disclosed in the plan document. 

The PPACA requirements overlap with proposed cafeteria plan regulations that the IRS issued in 2007. These proposed regulations contain requirements regarding what must be included in a written cafeteria plan document. One requirement is to specify the maximum amount of salary reduction contributions that may be made to a health FSA. The proposed regulations generally require plan amendments to be adopted prior to the date when they become effective. The proposed regulations also contain the “use-it-or-lose-it” rule, which generally prohibits contributions under a health FSA from being used in a subsequent plan year or period of coverage. Failure to satisfy these rules would trigger disqualification of the entire arrangement resulting in adverse tax consequences. Plan sponsors must be aware of the impact the new guidance will have on their cafeteria plans and health FSAs.


The Notice clarifies how the new $2,500 limit will operate. It specifies that the “taxable year” described under the PPACA provision means the plan year and not the taxable year of the plan sponsor. The $2,500 limit on health FSA salary reduction contributions will apply on a plan year basis effective for plan years beginning after Dec. 31, 2012.

The Notice also addresses operational issues in dealing with the $2,500 limit. First, if a plan provides a grace period (i.e., participants in a calendar year health FSA have until March 15 of the following plan year to incur expenses and get reimbursements), unused salary reduction contributions carried over into the next year would not count against the $2,500 limit for the subsequent year. Not all health FSA plan documents contain this provision and a plan sponsor cannot apply this operational rule unless it is in the plan document.

Second, the Notice provides guidance as to how employer non-elective contributions, sometimes referred to as flex credits, are to be accounted for in dealing with the $2,500 limit. If such flex credits must be used for a qualified benefit such as a health FSA, the participant may still elect to make a salary reduction contribution of $2,500. However, if the flex credit may be used for the qualified benefit or cashed out, those flex credits will be treated as a salary reduction contribution and, as a result, will impact the amount of salary reduction contribution that a participant may make.

Third, the Notice provides relief and the opportunity for correction in the event that salary reduction contributions exceed the $2,500 limit, and if it was the result of a reasonable mistake and not due to the employer’s neglect.

Request for Comments -- Use-It-or-Lose-It Rule

The IRS specifically requested comments in the Notice on the use-it-or-lose-it rule under the proposed regulations. The IRS and the Treasury Department are considering modification of the use-it-or-lose-it rule.  The comment period ended Aug. 17, 2012 and may result in the liberalization of the use-it-or-lose-it rule.


Notice 2012-40 provided some needed guidance in dealing with the new $2,500 limit for health FSAs. Due to the delayed plan amendment requirement and outstanding final cafeteria plan regulation, plan sponsors have generally been waiting before taking action with respect to their plan documents. However, plan sponsors must be ready to comply from an operational perspective in 2013. Because many cafeteria plans are operated on a calendar year basis, this will require action in late 2012 to ensure that plan participants are notified of the changes and plan operations are updated accordingly.

The contents of this message are for informational purposes only. If you have any questions regarding Notice 2012-40 and its impact on your health FSA, please contact any of the following members of our Employee Benefit Plan Services Group.


Recent Developments in Accounting Standards

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FASB Issues Accounting Standards Update No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment

In July 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The objective of the amendment is to help simplify the impairment testing and to improve consistency in impairment testing of indefinite-lived intangible assets other than goodwill, such as licenses, distribution rights and trademarks. 

Previously, a company had to perform an annual impairment test of an indefinite-lived intangible asset by comparing the fair value of the asset to its carrying amount on the books. If the fair value was determined to be below the carrying amount, then an impairment loss was recognized in the amount of the excess cost over fair value.

Under this update, a company now has the option to perform a qualitative assessment first to determine whether a quantitative assessment of fair value would be needed. If the company’s qualitative assessment determines that it is "more likely than not" that the indefinite-lived asset is impaired, then the company is required to perform the qualitative assessment. If it is determined that the indefinite-lived asset is not "more likely than not" to be impaired, then the company is able to stop its assessment at that point.

The amendments in this update permitting a company to assess qualitative factors is similar to the amendments for goodwill impairment testing contained in ASU No. 2011-08.

ASU No. 2012-02 applies to all entities with long-lived intangible assets and is effective for fiscal years beginning after September 15, 2012. Early adoption is permitted.


FASB Issues Accounting Standards Update No. 2012-05, Statement of Cash Flows (Topic 230): Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows

The FASB issued Accounting Standards Update No. 2012-05, Statement of Cash Flows (Topic 230): Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows on October 22, 2012. The update sets forth guidance on the classification of cash receipts from the sale of certain donated financial assets, such as investment securities, in the statement of cash flows. Prior to this ASU, Not-for-Profit (NFP) entities would classify these cash flows as either investing cash flows or as either operating or financing cash flows dependent upon how they classified cash inflows resulting from cash contributions.

Under this update, NFPs will classify the cash receipts from the sale of donated financial assets consistent with where the NFP classifies its cash donations received when the sales of the financial assets donated is nearly immediately converted to cash without any NFP-imposed limitations for the sale. Under this scenario, the cash flows would be recorded as an operating cash flow, as long as there is no donor restricted use imposed for long-term purposes. If there is a restriction imposed for the use for long-term purposes, then the cash receipts should be classified in financing activities. If the financial assets are not nearly immediately converted to cash, then at the time a sale does occur, the cash inflows will be classified as cash flow from investing activities for the NFP.

ASU No. 2012-05 is effective prospectively for fiscal years, and interim periods within those years, beginning after June 15, 2013. Retrospective application to all prior periods presented upon the date of adoption is permitted.


FASB Issues Proposed Accounting Standards Update, Comprehensive Income (Topic 220): Presentation of Items Reclassified Out of Accumulated Other Comprehensive Income

The FASB issued a proposed accounting standard update on August 16, 2012, related to the presentation of amounts that are reclassified out of accumulated other comprehensive income (AOCI). The full proposed ASU can be found on the FASB site.

The proposed update does not change the reporting of other comprehensive income but would require enhanced disclosures to present separately by component reclassification out of AOCI. A tabular presentation related to amounts reclassified out of AOCI for items required under U.S. GAAP to be reclassified directly to net income in their entirety would be required. For items not required under U.S. GAAP to be reclassified directly to net income in their entirety, the tabular disclosure would only include a cross-reference to other disclosures for those items. The updated presentation is designed to help provide a better reference to other disclosures that have additional information related to amounts reclassified out of AOCI. The proposed change is due to the FASB's cost/benefit analysis of its issuance of ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which was designed to increase the prominence of other comprehensive income in the financial statements.

The amendments in this proposed update would apply to all companies that issue financial statements in accordance with U.S. GAAP and that report items of other comprehensive income. The effective date will be determined after the FASB considers the feedback from the proposal.


American Institute of Certified Public Accountants Has Proposed a Financial Reporting Framework for SMEs

On November 1, 2012, the American Institute of Certified Public Accountants (AICPA) released for public comment the exposure draft Proposed Financial Reporting Framework for Small- and Medium-Sized Entities. The proposed Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs) is designed for privately owned, for-profit entities that are not required to produce financial statements in accordance with U.S. GAAP.

The proposed FRF for SMEs is a special purpose framework (formerly referred to as other comprehensive basis of accounting) intended for use by privately-held small- to medium-sized entities in preparing their financial statements. The proposed FRF for SMEs follows the general principal that historical cost is the most useful measurement basis for the users of SME financial statements and the most cost-beneficial approach for management.

Some of the key features of the proposed framework include the following:

  • Historical cost is the primary measurement basis
  • Closely aligned with the accrual basis of accounting
  • Disclosures are reduced, while still providing users with the relevant information
  • Familiar and traditional accounting methods are used
  • Adjustments needed to reconcile tax return income with book income are reduced
  • Principal-based framework, usable across industries by incorporated and unincorporated entities
  • Only financial statement matters that are typically encountered by SMEs are addressed in the framework

The FRF for SMEs is not proposed as an authoritative document, and the AICPA would have no authority to require the use of the FRF for SMEs. Use of the FRF for SMEs would be a choice made by management of the entity after considering the users of the financial statements.

Currently, the AICPA is asking for comments on the proposed framework. The comment period ends January 30, 2013. The AICPA has a resource page that provides additional information on the proposed FRF for SMEs:

The AICPA anticipates issuing a final framework in the first half of 2013.

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