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The New Jersey chapter is growing and welcoming professional advisors who help business owners plan for a successful exit. As we continue to examine many of the different planning considerations and decisions an owner needs to face, our members participate in this interactive discussion. We welcome your attendance at our next meeting.
Most professional investors say that they would rather invest in a mediocre company with a great management team than a great company with mediocre management. In this session, we will explore the challenges investors and owners face with their management teams. What ways can owners identify the additional management needs of the company? Is the team that in place capable of taking the organization to the next level?
Our discussion will be led by Terry Gallagher of Battalia Winston and focus on when the shareholders of the business realize that the existing management team of the business is not capable of moving the company to an attractive sale prospect, and an outside executive is needed to be brought in to build the company to the point where it can be sold. Terry’s experience will allow him to discuss different situations where the business owner has faced this situation, and how an executive search firm has helped the business owner.
This highly interactive session will allow for participation by attendees in a collaborative format. As an association of experienced advisory professionals for business owners and their companies, we are all focused on delivering the highest level of subject matter expertise to our clients and we would value your expertise and insights.
We invite you to join us for this exciting event and for the entire series this year!
To make it easy to remember, we’ll always meet on the 3rd Wednesday morning of each month through June 2019, so please set up a recurring calendar appointment now so you won’t miss an XPX breakfast!
Terry Gallagher joined Battalia Winston in 1991 and focuses on recruiting CEO’s, Presidents, Division General Managers, CFO’s, CIO’s, Board Directors and all C Suite Executives for Fortune 500 as well as Middle Market Companies and private equity firms as well as Partners, Practice Leaders and Rainmakers for consulting firms. He has consulted for a broad range of industries including: Industrial Products, Insurance/Financial Services, Professional Services, Technology, Business Services, Consumer Goods and Healthcare. He served on the Americas Board for the Association of Executive Search Consulting Firms for seven years and the Advisory Committee for the National Association of Corporate Directors New Jersey Chapter. Recognized by Business Week as one of the World’s Most influential executive search professionals, Terry is a thought leader regarding executive recruitment and retention, organizational effectiveness, management development and succession planning.
Ann Bank Parking Garage
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Please join us in May! You may find registration information here.
For questions regarding the event, please contact me at email@example.com.
David DeMuth is on the Event Planning Committee for NACD NJ and this meeting is open to all. The Subject of Disruption Risk should be of interest to Board members, CEOs, CFOs, CIOs, General Counsel, etc…
Existing enterprise risk management (ERM) approaches may no longer be sufficient to address risks that are complex, less well-known or highly disruptive to business. And the traditional ERM identification and tracking methodologies may be insufficient to address this new risk environment. You’ll leave this program with practicable tools to help your board-
Speakers include: Maureen Breakiron-Evans, Director of Cognizant Technology Solutions, Ally Financial & Cubic Corporation; Kelly Watson, Global Lead Partner of KPMG; Matthew Espe, Director of WESCO International, Realogy Holdings, Foundation Building Materials, Inc., and Cenveo Corporation and Andrea Bonime-Blance, Founder & CEO of GEC Risk Advisory.
Attendees will receive a copy of The Report of the NACD Blue Ribbon Commission on Adaptive Governance: Board Oversight of Disruptive Risks.
When: April 18th: 5:30 p.m. – 6:00 p.m: Networking, Cocktails, Full Buffet Dinner; 6:00 p.m. – 7:30 p.m:Program & Dessert
Location: The Manor
111 Prospect Avenue
West Orange, NJ 07052
Pricing: Member Price: $75
Non-Member Price: $90
Please join us next week. You may find registration information here.
For questions regarding the event, please contact David DeMuth at firstname.lastname@example.org.
When a board of directors is determining the compensation for a company’s CEO and other top level executives, there are many factors that must be examined before enacting a specific compensation plan.
Below are multiple articles related to executive compensation decisions:
-One important thing to consider when evaluating any investment opportunity is executive compensation. An executive who is not compensated properly may not have the correct incentive to preform with the best interests of the shareholders. Justin Kuepper explains how to evaluate executive compensation in his article, titled “Evaluating Executive Compensation.”
-In Carmen Nobel’s article, titled “Who Really Determines CEO Salary Packages?” Nobel touches on why, although every CEO and company are very different, executive compensation packets generally look very similar. Two reasons for this are that many directors belong to boards at multiple firms and the second is compensation consultation commonality.
-Some people feel that CEOs are actually being compensated far too highly, including Steven Clifford in his article, titled “How Companies Actually Decide What to Pay CEOs.” In this article, Clifford argues that a luxury tax on any company that pays an executive over six million would be a solution to the over payment of executives.
By Peyton Wille, CFO Consulting Partners
For any company that is new or in the process of growing in size, cash management is a very important aspect of the business. Cash management is classified by Inc.com, as a broad term that refers to the collection, concentration, and disbursement of cash.
Below are multiple articles related to the importance of cash management:
-For middle-market businesses, cash flow can be even more important than sales and profits, since if the company’s cash flow suffers, the sales and profits won’t matter and the business could fall into failure or bankruptcy. Cadence Bank explains seven ways to prevent this in their article, titled “7 Ways to Strengthen Cash Flow in a Middle-Market Company.”
-Richard Passov wrote an article for the Harvard Business Journal about cash flow titled, “How Much Cash Does Your Company Need?” His article provides a model for how companies should go about determining their optimal capital structure.
-In a great article by Rebecca Macdonald and Nathan Zhu, titled “The Importance of Cash Flow Management,” Macdonald and Zhu ask an important question to business owners, “How well do you know when and where your cash is coming from or going to?” One of the most interesting facts from this article was that only slightly over 50% of small businesses even have positive cash flows.
By Peyton Wille, CFO Consulting Partners
Chip Steppacher, Director, CFO Consulting Partners
Revenue recognition within the software industry has generally been a complex topic with many industry-specific standards and interpretations. With this new single revenue recognition standard (ASC 606) replacing the industry-specific standards, the software industry has been one of the most impacted. The effective date for ASC 606 for private companies is the annual reporting periods beginning after December 15, 2018 and interim periods thereafter. For most public business entities, the effective date was their annual reporting period beginning after December 15, 2017.
This article summarizes some of the most common implementation challenges faced by CFO’s in the software industry across the five core principles in ASC 606:
Identify the contract with the customer
In addition to requiring that the contract has been approved by both parties, one of the challenges in determining whether the software contract meets all of the criteria of ASC 606 is the assessment of collectability provisions of the standard. The concept of considering the credit risk of the customer within the collectability provisions of the standard is important in determining whether collection is probable. If the software company concludes that it is not probable that it will collect a portion of the expected consideration in the contract, then the amount of revenue recognized will be reduced from the contracted amount until the collectability criteria is met.
Identify the performance obligations
Identifying separate performance obligations under ASC 606 is a significant change for the software industry. Software arrangements are generally comprised of:
Under the new standard, the software company must determine whether these promised goods and services are distinct. If the goods and services are determined to be distinct, then each distinct performance obligation will be allocated a portion of the transaction price and revenue recognition assessed separately. However, in many software contracts this determination requires a series of management judgments on which products and services are combined for purposes of this principle. These combined performance obligations will ultimately determine whether the obligation is satisfied at a point in time or satisfied over time.
Determine the transaction price
The transaction price includes only those amounts where the software company has enforceable rights under the contract. If the contract price is fixed, then its application is straightforward. If the contract price is variable or there are service level agreements in place, there are additional considerations. The most significant challenge is estimating the variable consideration over the contract period based on expected value, including a determination that it is probable that there will not be a significant downward adjustment of the revenue recognized over time. Compared to the previous software standards, this estimate of variable consideration may result in earlier revenue recognition under ASC 606.
Allocate the transaction price to distinct performance obligations
After the software company identifies the distinct performance obligations and determines the transaction price of each contract under the standard, the next challenge is allocating the transaction price to these obligations. The standard introduces the concept of relative standalone selling price or SSP. If the products or services are sold separately in similar circumstances, then the determination of the SSP and allocation is straightforward. If the SSP is not directly observable, then the SSP will need to be estimated. Since software vendors tend to bundle their software licenses with other products and services, this determination of the SSP for each performance obligation will require management to exercise expert judgment, appropriate internal governance and detailed documentation of their conclusions. These determinations could materially impact the revenue recognized.
The timing of revenue recognition for software products and services is based on when control is transferred to the customer. Management should evaluate transfer of control primarily from the customer’s perspective and assess whether control transfers at a point in time or over time. The complexities of implementation manifest when performance obligations are combined or the software license fees are based on sales or usage royalties. This may require further estimates and management judgment to determine revenue recognition under the new standard.
CFO Consulting Partners has worked with its clients to interpret and implement ASC 606 and ensure that the client is ready for full implementation and audit preparedness of the standard. As part of our work, we can assist in working through the implementation challenges, choosing the transition method, as well as determining the required disclosures. We have experience in establishing appropriate corporate governance to support management judgments and ensuring consistency in the estimation methods employed. It is also important that policies and procedures for ASC 606 and revenue recognition are documented around the end-to-end accounting and reporting process.
CFO Consulting Partners is a proud sponsor of ACG Philadelphia’s Breakfast Meeting. The subject for the Breakfast Meeting will be Economic Outlook: Managing & Deploying Capital in Volatile Markets.
James Carville uttered the famous warning to Bill Clinton: “It’s the economy, stupid!” But is it the economy or political machinations that are driving capital flows, Fed policy (including rate hikes and balance sheet reductions), equity market volatility and confidence, both consumer and business?
It’s important, as investors and acquirers, to separate the temporary impacts of political gamesmanship from the underlying real economic trends, as those will largely determine the future direction of the economy. And when it comes to successful investment opportunities, its the future economy that matters.
So, are we headed into a recession or will growth stay solid and interest rates rise?
Join us as we welcome one of our most engaging and highly-rated economists, Joel Naroff, to discuss these issues and others that will impact the flow of capital and investment in the coming year.
When: March 227:15 AM Registration: 8-9 AM Program: 9-10 AM Space Available for Continued Networking
Location: Union League
Meade & Grant Rooms
140 South Broad | Philadelphia, PA
Pricing: $45.00 ACG Members
To register please click here.
Mark Sloan, Director, CFO Consulting Partners
In our newsletter for January 2018, we discussed the new guidelines under ASC Section 842 regarding the recognition and financial reporting of leases. In that newsletter, the focus was primarily on the lessee, as there are significant changes affecting lessees, e.g., the recognition of a right of use asset and a corresponding liability on the balance sheet, and the concept of embedded leased assets within service agreements, to name a few. In this newsletter, the focus will be on the impact of this standard on lessors.
In addition, during the year, there were updates to ASC 842 providing clarification to the intended application of certain aspects of the standard, correct cross-reference inconsistencies, and provide entities with an additional optional transition method. This newsletter will focus on the additional optional transition method that is available for all entities.
EFFECTIVE DATE OF IMPLEMENTATION:
ASC 842 is effective for public firms, certain not-for-profits and certain employee benefit plans in years beginning after December 15, 2018 (including interim periods) and for all other entities in years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Earlier application is permitted for all entities.
TYPES OF LEASES UNDER ASC 842:
Under ASC 842, there are three types of leases that a lessor will record:
A fourth type lease which was allowed under previous GAAP, leveraged lease, has been eliminated under the new ASC.
A lessor will use the same lease classification criteria used by a lessee to determine the type of lease to be recorded. The five criteria are as follows:
1) Ownership is transferred at the end of the lease;
2) A bargain purchase option exists;
3) The lease term approximates the remaining economic life of the asset (assuming the lease term does not commence toward the end of the life of the asset);
4) The present value of the lease payments and any residual value guarantees equal or exceed the fair value of the asset, and;
5) The leased asset has no alternative use to the lessor at the end of the lease. If any of the above criteria is met, the lease will be determined to be a sales-type lease. Assuming the collectability of the lease payments is probable, the lessor will then, on commencement date of the lease, derecognize the carrying value of the underlying asset, and recognize the following:
a) A net investment in the lease, comprised of:
1) The present value of the lease payments to be received and the guaranteed residual value (both discounted using the rate implicit in the lease), and;
2) The unguaranteed residual asset, i.e., the present value of the amount the lessor is expected to derive from the underlying asset not guaranteed by the lessee, discounted using the rate implicit in the lease.
b) Any selling profit or loss arising from the transaction, and;
c) As an expense, any initial direct costs.
After the commencement date of the lease, the lessor will recognize the following:
a) Interest income on the net investment in the lease;
b) Variable lease payments which are not included in the initial net investment as either profit or loss in the period where the changes in facts and circumstance on which the variable lease payments are based occur, and;
c) Impairment of the net investment if such impairment is determined to arise.
If the collection of the lease payments is not probable, then the lessor would continue to reflect the underlying asset on its books, record depreciation expense on such asset and treat the lease payments as unearned income. Such accounting will continue until the collection of the rent payments is deemed probable, the contract has been terminated or the lessor has repossessed the asset. Upon the determination that the collection of the lease payments is probable, the unearned income would be reversed, the carrying value of the asset would be charged off to operations, and the present value of the remaining lease payments, the guaranteed residual value and the present value of the unguaranteed residual value would be recorded as a net investment.
If the transaction does not meet any of the above five criteria, the lease should be evaluated for the following two conditions:
1) The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments and/or any other third party unrelated to the lessor equals or exceeds substantially all of the fair value of the underlying asset, and;
2) It is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee.
If the lease meets both the above criteria, it shall then be classified as a direct financing lease. The main difference between a sales-type lease and a direct financing lease is the presence of a guaranteed residual value provided by a third party. Also, as opposed to a sales-type lease where initial direct costs are expensed out at the commencement date, under a direct financing lease, such initial direct costs shall be capitalized using separate discount rate and included in the measurement of the net investment in the lease. Another difference between a sales-type lease and a direct financing lease is that in a direct financing lease, the selling profit is required to be deferred at the commencement date and included in the measurement of the net investment in the lease. Such profit will be recognized into income over the terms of the lease. Any loss arising from the transaction will be immediately recognized (similar to a sales-type lease).
If a transaction is determined not to meet the criteria of a direct financing lease, it will then be recognized as an operating lease. As such, the lease payments are recognized in income over the straight line method (unless there is another systematic and rational basis that better represents the underlying transaction), variable lease payments are recognized as income in the period in which changes in facts and circumstances giving rise to the payments occur, and initial direct costs are reflected as an expense over the lease term on the same basis as lease income. The leased asset continues to be shown on the balance sheet of the lessor, with periodic charges to reflect the depreciation of the asset. Fundamentally, the accounting for an operating lease for a lessor remains consistent with the guidance found in the previous standard (ASC 840).
If a lease agreement is replaced by a new agreement with a new lessee, the lessor shall account for the termination of the original lease and shall account for the new lease as a separate transaction.
Also, under ASC 842 and consistent with the treatment required of lessees, lessors are required to allocate consideration in a contract into separate lease and non-lease components. Using the guidance on variable consideration under ASC 606 Revenue Recognition, this would relate to the transfer of one or more goods or services that are not leases or an outcome from transferring one or more goods or services that are not leases. An example of a non-lease component would be payment by the lessee to the lessor for common area maintenance, utilities or cleaning services. There is a practical expedient that a lessor can elect and that is, by class of underlying asset, not to separate non-lease components from the associated lease component and instead, to account for those components as a single component if the non-lease components would otherwise be accounted for under the new revenue guidance under ASC 606 and both the following are true:
1) The timing an pattern of transfer of the non-lease components and lease components are the same, and;
2) The lease component, if accounted for separately, would be accounted for as an operating lease.
If the non-lease component or components associated with the lease components are the predominant component of the combined components, then the entity is required to account for the combined component in accordance with ASC 606, Revenue Recognition. Otherwise, the entity must account for the combined component as an operating lease in accordance with ASC 842.
There can be complex transactions involving sales and leaseback arrangements and the accounting for deferred taxes which are beyond the scope of this newsletter. This newsletter is intended to provide a very high level summary of the more pertinent areas of the new standard.
In the financial statements in which an entity first applies the standard, the entity will apply the standard to all leases that exist at the beginning of the earliest comparative period presented. An entity shall adjust the equity at the beginning of the earliest comparative period presented and other comparative amounts disclosed for each prior period presented.
A lessee may elect not to apply the standards to short-term leases, i.e. leases with a term less than twelve months.
Practical expedients were provided in the initial ASC 842 standards. They must be elected as a package and applied consistently to all leases that commenced before the effective date of the standard:
1) An entity need not reassess whether any expired or existing contracts are or contain leases;
2) An entity need not reassess the lease classification (i.e., operating or finance lease) for any expired or expiring leases, and;
3) An entity need not reassess initial direct costs for any existing leases.
Another practical expedient that is available is the entity may elect to use hindsight in determining the lease term (including purchase options) and in assessing impairment of the entity’s right-of-use asset. This practical expedient may be elected separately or in conjunction with practical expedients mentioned in the aforementioned paragraph.
Accounting Standards Update 2018-11 provides entities (both lessees and lessors) with an additional optional transition method upon adoption. An entity may elect, in lieu of restating prior years financial statements for the implementation of ASC 842, to recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. For an entity providing comparative financial statements, the statements for the periods prior to adoption would continue to reflect the standards under ASC 840, along with the footnote requirements under ASC 840 for such periods.
Public firms will need to disclose the effect on the pronouncement in the footnotes for 2018 financial statements, assuming they do not elect early adoption.
This summary, along with our newsletter of January 2018, is intended to provide an overview of the new pronouncement for lease accounting. This implementation is expected to have a deep impact on most entities and with the implementation date rapidly approaching, it is imperative that firms begin to understand the standard and assess the effect this pronouncement will have on their financial statements. For public firms, they will need to begin to reflect this new standard in their first quarterly financial statements for 2019.
CFO Consulting Partners has an extensive understanding of the new standard, and assist companies in the evaluation and implementation of this standard.
For many companies, the question about whether or not a full time CFO is necessary is often a question that is overlooked and small companies will rush into hiring an expensive CFO rather than outsourcing the work.
Below are multiple articles related to whether a full time CFO is necessary:
-In Patrick Curtis’s article, titled “Hiring or Outsourcing the CFO: What Makes Most Sense for My Business?, he stresses the importance of the decision to hire or outsource the CFO position. The article explains many of the benefits that come with the utilization of an outsourced CFO.
-For many growing companies, the financial resources are not always readily available to take on a CFO, but a small business owner should not worry about this situation. Peter Daisyme explains three alternatives to a full time CFO in his article, titled “Can’t Afford a Full-Time CFO? Here Are 3 Options to Try.”
-If a business owner reaches the conclusion that they do not need a full time CFO, there is still another decision to be made; whether the business should fill the void with an interim CFO or a Part-time CFO. In Paro’s article, titled “When You Need an Interim CFO vs. a Part-time CFO,” he explains the implications of either decision.
By Peyton Wille, CFO Consulting Partners
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