Understanding fair market value

FMV is used whenever an item is bought, sold, or donated, as these transactions have tax implications. Some of the more common examples include:

• Buying or selling your home or other real estate
• Buying or selling personal property
• Buying or selling business property
• Establishing the values of other business assets, like inventory
• Valuing charitable donations of personal goods and property, like automobiles
• Valuing the barter of services
• Valuing transfers of business ownership
• Valuing the assets in the estate of a deceased taxpayer

Defending your FMV determination

To help defend your FMV determinations, consider the following:

Properly document donations. The FMV of non-cash charitable donations is an area that the IRS can easily challenge. Ensure your donated items are in good or better condition. Properly document the items donated and keep copies of published valuations from charities like Goodwill. Don’t forget to ask for a receipt (confirmation) of your donations.

Donate capital items like automobiles to the correct places. You may use the FMV of a donated automobile, but only if the charity receiving the automobile will use it themselves or provide it to someone who will. If not, the charity’s resale value will determine the FMV of the donated vehicle. Therefore, exercise caution when contributing to organizations such as Kars4Kids, as they may restrict the value of your donation!

Get an appraisal. If you sell a small business, a collection, artwork, or a capital asset, consider obtaining an independent appraisal of the property beforehand. While still open to interpretation by the IRS, getting a third-party appraisal can be a solid basis for defending any differences between your valuation and that of the IRS.

Keep copies of similar items and transactions. This is especially important if you barter goods and services. If you have a copy of an advertisement for a similar item to the one you sold, it can readily support your FMV claim.

Take photos. The condition of an item is often a key determinant in establishing FMV. It is fair to assume an item has wear and tear when you sell or donate it. You can use visual documentation to support your claimed amount.

Keep good records. Keep copies of invoices for major purchases and retain bills for any improvements. Make sure your sale of property includes a dated bill of sale that clearly states the transfer of ownership and the amount paid for the item.

With proper planning, establishing the fair market value can be done in a way that is defensible against a challenge from the IRS. Contact our RRBB advisors if you have any questions.

The post Defending fair market value appeared first on RRBB.

Reporting requirements

A company that has been delisted can choose to remain registered with the SEC and be listed on the over-the-counter (OTC) markets. If the company is still registered with the SEC, it must continue to file periodic reports such as quarterly and annual statements. They must continue to adhere to filing deadlines, financial statement disclosures, and accounting standards similar to those required for listed companies. Additionally, delisted companies are required to disclose any significant business or operational changes that could materially affect the company’s finances.

Alternatively, companies that have been delisted may choose to deregister their securities with the SEC to suspend or end their reporting obligations.

Review of financial instruments

Management should review any shareholder agreements and the terms of any outstanding financial instruments as soon as a company receives a deficiency notice or delisting becomes imminent. Certain debt instruments might include covenants requiring the company to maintain a listing, and failing to do so could result in the event of default. For financial instruments measured at fair value, such as options, warrants, or derivatives, the valuation of these instruments becomes more complex, requiring specialists. Pricing models typically rely on stock prices, which can become costly and time-consuming post-delisting and deregistration.

Delisting due to deficiency notices are indicators of financial difficulties, thus indicating that the company’s assets, including intangibles, and goodwill may be impaired. This process involves reassessing the value of goodwill and other assets based on the new status and outlook. This process can takes significant time to complete and should not be an afterthought, as it can lead to missing filing deadlines.

Auditor impact

Keep your auditors informed of the company’s decision on how to move forward. Auditors may maintain a low-risk client profile that does not allow for the acceptance and continuation of companies listed on the OTC. A new auditor may need to be engaged in order to adhere to SEC registration requirements.

Please Note: This article is not an attempt to provide investment advice. The content is purely the author’s personal opinions and should not be considered advice of any kind. Investors are advised to conduct their own research or seek the advice of a registered investment professional.

This article, authored by Brian Zucker and Stephen McSweeney, was originally written for and published by Planet MicroCap Review Magazine.

The post “Delisted Accounting” Published by Planet MicroCap Review Magazine appeared first on RRBB.

Issues with name changes

If the name on your tax return does not match the name on file with the Social Security Administration for your Social Security number, here’s what could happen:

• Your tax return might be rejected when you try to e-file
• The IRS automatically accepts your income as taxable but then disallows any deductions
• You may receive a notice from the IRS with taxes owed and underpayment penalties

Avoid name mismatch audits

1. Before filing your tax return, go to www.ssa.gov, follow the instructions for changing your name, and file it as soon as possible.
2. Also, notify your employer. Double-check the W-2 you receive to ensure your name is correct. If the change is on your W-2, you must ensure it updates with the Social Security Administration too.
3. If you are planning a significant financial transaction soon, you may wish to adjust the timing of the transaction or the timing of your name change to avoid complications.
4. Remember to also change your name on other important documents, such as auto titles, driver’s licenses, property titles, bank accounts, loan agreements, beneficiary documents, and other accounts.

If you cannot make the name change on time, use the name on file at the Social Security Administration AND with your employer when filing your taxes to avoid the automatic notification of a name mismatch.

The Social Security Administration’s website walks you through the name change process. Please note that this process is not as simple as it was in the past. You must now provide proof of citizenship and submit documents showing the original and new names. Spend some time going over the name change process and plan accordingly. Contact our RRBB advisors if you have any questions or need further assistance.

The post How to avoid name mismatch audits appeared first on RRBB.

1. Good inventory management creates less shrink

Shrinkage represents the cash that goes to waste because inventory is damaged, stolen, or past the sell-by date. Shrink represents an opportunity to improve the inventory control process. Understanding the dynamics of shrink will help focus your attention in the correct areas and ultimately lead to money saved.

Action item: Create a shrink scorecard that shows the source of the shrink. For example:

• Are you experiencing theft? Is it occurring at retail or in receiving?
• What if your products are out of code? Is the problem in all products or a select few?
• Do you have damaged goods? Is it trackable to the supplier or a part of your production process?

Remember to compare waste to prior years and also against your goals to see how well you are doing.

2. Aligning inventory operations with sales gives you more cash

In a perfect world, you receive your inventory as soon as it is sold. Material or product that sits in the warehouse adds storage costs and risks turning into unsellable products. Therefore, aligning your inventory operation with your sales cycle plays directly with improving your cash flow. In addition, understanding sales trends will allow you to optimize your stock levels and save money in the process. When you spend less on unnecessary inventory costs you have more cash to invest in marketing, new product initiatives, or capital equipment that can bolster your bottom line.

Action item: Implement just-in-time (JIT) with key suppliers. Explore ways to deliver a product when needed rather than purchasing a larger amount and storing it.

3. Improved forecasting helps your business grow

The old saying, “garbage in, garbage out” applies perfectly when trying to forecast inventory demand. If you can’t trust your inventory process, it’s impossible to accurately predict future output. This leaves you flying blind when budgeting and preparing for future expenditures. Your forecasting will become more accurate with a firm grip on your inventory needs and procurement-to-sales cycle.

Action item: Create a rolling 12-month forecast of sales. The forecast should provide details on major product lines. Translate this forecast into lead times for your inventory procurement.

4. Prioritizing inventory management creates better customer relations

Once you’ve optimized your operation, the quality of your customers’ experience increases exponentially. You can cut prices without sacrificing margin, improve lead times, and add new product lines with your extra cash. While the effective inventory process you built is humming along, you can focus your attention on improving your products to better match the needs of your target market. This will help boost your sales!

Action item: Set inventory targets to shorten lead times. Measure your many back orders and note how often products are returned as defective. If your inventory management improves, then you should see positive results in both areas.

Inventory management will not take care of itself. Giving your inventory system the attention it deserves will pay major dividends both now and in the future. Contact our RRBB accountants and advisors if you have any questions.

The post 4 ways prioritizing inventory management can help your business appeared first on RRBB.

1. Authorization of cash expenditures
2. Physical custody of cash
3. Reconciliation of cash expenditures

Separate cash disbursements

Only a designated, trusted manager should sign checks, authorize electronic payments, or perform fund transfers. This control has a dual purpose: management sees how the company spends its money, and the cash disbursement function is kept separate from bookkeeping and accounting. The opportunity to embezzle is much higher if the same person signs checks, authorizes electronic transactions, and enters disbursement transactions in the accounting records. You can strengthen this function by having solid purchase order policies and separate processes for approving bills. Then the person who signs checks or authorizes transactions can ensure payment approval before disbursing the cash.

Separate control of cash

Have an owner or manager occasionally spot-check incoming electronic transactions and tie them to the company bank account. If you receive physical checks, have an owner or manager open the mail before passing it on to accounting. That’s one way to detect unusual transactions before recording them in the company books. Alternatively, ask someone separate from accounting to open the mail and prepare a deposit slip or daily reconciliation of all transactions.

Separate reconciliations

For companies with limited resources, a periodic review of bank reconciliations by someone outside of accounting can provide mitigating control. Non-accounting personnel performing these reviews will need training. They’ll need to understand the risks involved and the types of unusual or unsupported transactions requiring further investigation. Cross-training staff also helps ensure operations continuity when accounting employees take vacations or leave the company. Or better yet, bring in an outside accounting expert to conduct periodic audits of critical functions.

Separation of duties

Fraud and embezzlement don’t just happen at large companies. Theft may be more common in small businesses because many need more internal controls than in larger organizations. But the good news is that adequate internal controls can be simple and inexpensive. Separation of duties can help your company keep track of cash and help prevent theft by an employee before it happens. Contact our RRBB accountants and advisors if you have questions or need further assistance.

The post Safeguarding your business’s cash with separation of duties appeared first on RRBB.

The IRS releases its Data Book annually, which details all of its activities. And during the past few years, audits have focused mainly on tax returns with a Schedule C for small business operations. So for sole proprietors, how can you prepare for a potential audit? Here is some advice.

Advice for sole proprietors

• Separate your records. Blending your personal and business expenses is the quickest way to get a rejection for a business deduction. Consider creating a different bank account and using another credit card for company costs as an alternative.
• Retain logs. Maintain a notebook for business meetings, meals, and kilometers traveled. Add the meeting’s date, time, topic, and attendees.
• Think ordinary vs. necessary. The IRS specifies two crucial words that must be used to qualify as legitimate, deductible business expenses:
  • Ordinary: A cost that is standard in your sector
  • Necessary: An expense that is beneficial and appropriate for your business
• It’s a business, not a hobby. Direct deductibility of eligible expenses is permitted for qualified business expenses but not hobby activity expenses. Although there are numerous aspects to this issue, to avoid the hobby dilemma, you must have a profit motive and actively engage in the activity to qualify it as a business.
• The IRS will be aware. The IRS will require third-party payment processors to send 1099-K forms in 2023 for all transactions above $600. The IRS will seek a business tax return if you accept credit cards or other electronic ways of payment from clients. So, keep accurate records!

Prepare for an audit

Please don’t hesitate to claim the proper deductions because the IRS concentrates its audit activity in this area. Be ready to back up your claims with stellar credentials. Contact our RRBB accountants and advisors if you have any questions in the meantime.

The post An IRS audit target: the sole proprietor appeared first on RRBB.

In today’s uncertain market, maintaining the status quo might be dangerous. Businesses must “level up” by being proactive and adaptable if they want to prosper. However, some managers might not know where to begin or be at a loss for fresh ideas. Fortunately, audited financial statements deliver more than just that. They’re accompanied by a management letter that suggests ways to maximize your company’s efficiency and minimize its risk. These letters offer new, outside viewpoints and innovative ways to handle supply chain constraints, inflationary pressures, and other recent changes.

Auditing standards

Generally Accepted Auditing Standards require auditors to report any material weaknesses or significant deficiencies in internal controls found during audit fieldwork in writing. A material weakness is “a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.”

Material weaknesses are more severe than significant deficiencies. A significant deficiency is “a deficiency, or a combination of deficiencies, in internal control that are… important enough to merit attention by those charged with governance.”

During an audit, auditors could find less severe weaknesses and operational inefficiencies. Although reporting these items is optional, the management letter frequently contains them. In addition, each deficiency comes with a detailed description. That includes an observation (and, if applicable, a reason), the financial and qualitative effects, and a suggested path of action.

The management letter

Audits ought to involve more than merely checking for compliance. Management letters highlight the takeaways from the audit fieldwork on how to enhance many facets of the business operations.

For instance, a management letter can note a considerable increase from the previous year in the typical accounts receivable collection period. The letter might offer reasonably priced advice on how to speed up collections. Some of that advice may include creating early-bird discounts and utilizing electronic payment systems to enable real-time bills and online payment. Finally, the letter can discuss how increased collections might increase operating cash flow and reduce bad debt write-offs.

Consider the management letter, but remember that your auditor is not giving you a grade for your performance. Instead, the letter’s purpose is to offer guidance based on best practices that the audit team has gathered from dealing with other clients over time.

Observant auditors may offer commentary on a variety of problems they run into while conducting an audit. In addition to internal controls, examples include:

• Cash management
• Operating workflow
• Scheduling control
• Capacity concerns
• Flaws and waste
• Employee benefits
• Safety
• Website administration
• Technological advancements
• Energy usage

Take your audit to the next level

Never file the management letter with your audited financial statements without taking the time to read it. The same talking points come up far too frequently year after year. Proactive managers should contact our RRBB accountants and advisors to discuss how to make improvements as quickly as possible after realizing these letters’ significant insights.

© 2022

The post Management letters: Follow up on your auditor’s recommendations appeared first on RRBB.

The financial figures do not tell the entire story. Knowing how to see warning signs of coming issues allows investors, lenders, and other stakeholders to safeguard their economic interests. More investigation may be required to find these flaws. For instance, stakeholders may need to speak with management, visit the firm’s website, and use the most recent financial statement to compute financial benchmarks. Here’s what to look for if you feel your business is in financial distress:

Employees who jump ship

Employee turnover at all levels frequently occurs before poor financial outcomes. One apparent explanation is that company insiders often know firsthand the potential problems. As a result, employees may look for better opportunities. For instance, if the plant manager’s creative ideas are repeatedly rejected owing to a lack of funding or if they overhear stockholders arguing over the company’s strategic direction.

The opposite also occurs. The loss of certain critical employees could result in a sharp decline in income or productivity. However, most well-established businesses can bounce back from losing a key individual given enough time and effort.

Layoffs may also be a factor in excessive staff turnover. Companies that can’t pay their employees may need to cut expenses and issue pink slips.

The cycle of employee turnover can be brutal. When apparent financial issues arise in a business, top performers may leave for healthier rivals. The lesser performers are left behind and are responsible for educating new workers on how the company runs. The borrower’s financial difficulty might be made worse by the time and expense involved in hiring and training additional employees.

Working capital concerns

The gap between a company’s current assets and liabilities is its working capital. You can monitor key turnover ratios to see how effectively the company handles its short-term assets and liabilities.

Accounts receivable turnover that substantially slows down could be a symptom of fraud, old accounts, or worse collection efforts. For instance, a business scrambling to increase sales can approach clients with bad credit. Or a company’s key customer may be underperforming, affecting the rest of the supply chain.

Also, watch out for declining inventory turnover. An increase in inventory on a borrower’s balance sheet may indicate ineffective asset management, similar to an increase in receivables. Inventory write-offs may be necessary for some product lines due to obsolescence. Or a brand-new plant manager can overestimate the quantity of buffer stock that the warehouse needs. It might even forewarn of fraud or financial misrepresentation.

Financial distress in the marketplace

The effects of external factors on a company’s financial success vary from one company to another. For instance, when the COVID-19 pandemic caused the economy to collapse, some businesses permanently closed while others changed course and flourished.

Today, geopolitical tensions, rising interest rates, supply chain constraints, and inflation may negatively influence business performance. Accordingly, stakeholders should closely monitor the financial outcomes in these uncertain times.

Stakeholders could push management to include interim reports in its year-end financial statements. Otherwise, hiring a CPA may be beneficial to carry out specific agreed-upon procedures when a business exhibits indicators of financial distress. By doing this, the business may evaluate risk, pinpoint issues, and, if necessary, devise corrective solutions. Contact our RRBB accountants and advisors for further details.

© 2022

The post Do you know the signs of financial distress in a business? appeared first on RRBB.

Financial statements consider past results. But there are occasions when you need forward-looking reports, like forecasts and projections, to:

1. Support your company’s application for a loan
2. Assess the sustainability of a turnaround strategy
3. Make strategic investment decisions.

In today’s uncertain market, your accountant can assist in making sure the hypotheses supporting future financial statements make sense.

Forecasts vs. Projections

When creating forward-looking financials, you generally have two options under AICPA Attestation Standards Section 301, Financial Forecasts and Projections:

1. Forecast. To the best of the responsible party’s knowledge and belief, prospective financial statements present an entity’s expected financial position, results of operations, and cash flows. A financial forecast is based on the responsible party’s assumptions reflecting the conditions it expects to exist and the course of action it expects to take.

2. Projection. Prospective financial statements that present, to the best of the responsible party’s knowledge and belief, given one or more hypothetical assumptions, an entity’s expected financial position, results of operations, and cash flows. A financial projection 

is sometimes prepared to present one or more hypothetical courses of action for evaluation in response to a question such as, “What would happen if … ?”

Subtle difference

Sometimes, the words “forecast” and “projection” are synonymous. But there is a significant difference: a forecast represents anticipated outcomes based on an expected course of action. These prospective reports are the most typical kind for businesses with consistent previous performance that want to keep things as they are.

On the other hand, a projection makes predictions about the business’s anticipated outcomes based on different speculative circumstances that may or may not materialize. When management is unsure about the likelihood of meeting performance goals, these comments are frequently employed. There is considerable potential that consumer demand or market conditions could change over time. They may, therefore, be ideal for start-ups or when reviewing results over a more extended period.

Critical components

The report will typically have the same style as your financial statements, regardless of whether you choose a forecast or projection. That includes an income statement, balance sheet, and cash flow statement. In addition, most prospective statements conclude with a statement of critical assumptions that underlie the numbers. Your company’s historical financial accounts and a thorough annual sales budget are the foundation for many of your assumptions.

Some businesses now employ rolling 12-month versions. These are adjustable and look beyond year-end rather than relying on static forecasts or projections, which can soon become outdated in a turbulent market. This version enables you to spot and address gaps in your presumptions and unforeseen industry changes. For instance, until circumstances improve, a manufacturer with a raw material scarcity can see an unexpected decline in sales. The business would be able to adjust its preparations for such a brief disruption if it keeps a rolling forecast.

Running a successful business requires careful planning for the future. Unfortunately, in these uncertain times, there is no guarantee that a forecast or projection to be 100% accurate. However, we can assist you in weighing your options for releasing upcoming financial statements. We can also help provide you with new, unbiased perspectives on your company’s potential developments. Contact our RRBB accountants and advisors today.

© 2022

The post Forecasts vs. projections: What’s the big difference? appeared first on RRBB.

Internal audit departments are typical in businesses. They check to see if the company is accurately reporting financial data according to U.S. Generally Accepted Accounting Principles (GAAP). Internal auditors must, however, look beyond compliance.

Internal audit teams with a broad perspective can increase the department’s impact by assisting their clients’ businesses in risk mitigation, process improvement, and business strategy analysis. How to obtain more from your internal audit team is provided here.

Expand the scope

Internal auditors’ skill sets make the department perfectly prepared to take part in controlling a variety of risks, such as:

• Operational
• Strategic
• Investment
• Information technology (IT)
• Merger and acquisition (M&A)
• Foreign corruption
• Business continuity risks

The internal audit team should adopt a forward-thinking attitude to optimize its usefulness. Individual auditors are well-equipped to assist in risk identification and assessment and support firms in foreseeing and overcoming challenges before an adverse event arises.

Use internal auditors like consultants

You could wait for the internal audit department to flag potential control or compliance failures. Or, your organization could use auditors’ experience to assess and enhance controls and ensure compliance before issues develop. Other functional areas, including manufacturing, sales, HR, finance, and procurement, might benefit from the department’s suggestions for streamlining procedures and eliminating waste and inefficiency.

The usefulness of the internal audit role can increase significantly, thanks to technological advancements. For example, one automated method is continuous auditing, which enables auditors to acquire vital data and spot issues immediately. This is a significant improvement compared to the conventional method, which involves internal auditors testing a small sample size and reporting their findings after the fact. Similarly, internal auditors may quickly identify anomalies and concentrate team resources on high-risk areas thanks to data analytics and predictive modeling.

Conduct quality assurance reviews

Internal audit departments should undergo periodic quality assessment reviews or QARs. According to the Institute of Internal Auditors’ Code of Ethics, Certified Internal Auditors must go through a QAR at least once every five years. This oversight makes it possible for the business to evaluate the department’s performance, skill, and objectivity and address any problems as soon as they arise.

Do your internal auditors possess the knowledge and experience required to fulfill the demands of today’s dynamic, complicated business environment? People with skills in IT, management consulting, and engineering are among the members of effective internal audit teams.

Your company may need to hire new auditors to bring new ideas to the department if your internal audit team lacks these abilities. Alternatively, you may want to investigate “co-sourcing” with an outside company to help address any internal skill gaps. Contact our RRBB accountants and advisors for further details.

© 2022

DISCLAIMER: “RRBB” is the brand name under which Rosenberg Rich Baker Berman P.A. and RRBB Advisors, LLC and its subsidiary entities, including CFO Financial Partners LLC, provide professional services. Rosenberg Rich Baker Berman P.A. and RRBB Advisors, LLC (and its subsidiary entities) practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations and professional standards. Rosenberg Rich Baker Berman P.A. is a licensed independent CPA firm that provides attest services to its clients, and RRBB Advisors, LLC and its subsidiary entities provide tax and business consulting services to their clients. RRBB Advisors, LLC and its subsidiary entities are not licensed CPA firms. 

The post Leveraging internal audits appeared first on RRBB.