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Bramwell’s Lunch Beat: ARCP’s Accounting Horror Story

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Oct 31st 2014
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Bank Leumi said to face $300 million demand in tax case
David Voreacos and Greg Farrell of Bloombergreported on Wednesday that New York’s banking regulator will ask for more than $300 million to settle an investigation into whether Bank Leumi Le-Israel BM helped Americans evade taxes, according to a person familiar with the matter.

Benjamin Lawsky, head of the state’s Department of Financial Services, is seeking more than what the bank set aside to resolve a separate criminal investigation by the US Justice Department. In June, Leumi said it allotted 950 million shekels ($254 million) for the federal matter, which would make it the first Israeli bank to settle a tax probe with the United States.

Bank Leumi, Israel’s second-largest lender by assets, said on Wednesday it’s in talks with Lawsky’s department on a settlement, according to a filing with the Tel-Aviv Stock Exchange, Voreacos and Farrell wrote. It’s too early to estimate if an accord may be reached and a final settlement may be “significantly higher” than the provisions it’s already set aside to cover those costs, the bank said.

Lawsky has taken a similarly aggressive approach with other banks. As part of a guilty plea in May by Credit Suisse Group AG’s main bank subsidiary, his office secured $715 million of the $2.6 billion penalty, according to the article. The Leumi probes are part of a seven-year US crackdown on offshore tax evasion.

SEC to open inquiry into American Realty Capital Properties’ Accounting
One of the largest US real-estate empires, American Realty Capital Properties (ARCP) Inc., was battered on Wednesday by its disclosure of an accounting mistake and subsequent coverup that forced the resignations of two top executives, slashed its flagship company’s stock-market value by 19 percent, and sparked a regulatory probe, Robbie Whelan, Craig Karmin, and Jean Eaglesham of the Wall Street Journalreported.

ARCP, the primary holding of property mogul Nicholas Schorsch, said in a securities filing that it asked its CFO and chief accounting officer to resign after determining the company had overstated a measure of income in the first quarter and that the executives chose not to correct the error in the second quarter.

The US Securities and Exchange Commission (SEC) intends to launch an inquiry into the accounting irregularities, according to a person familiar with the matter, wrote Whelan, Karmin, and Eaglesham.

The company determined there was no intent to overstate the accounting measure for the first quarter, but that the second-quarter number was based on a calculation made “in order to conceal the error from the first quarter,” Chief Executive David S. Kay said in a conference call on Wednesday.

ARCP said it overstated its adjusted funds from operations, a common measure of REIT performance that shows a trust’s net income, by $12 million, or 8.8 percent, for the first three months of 2014, and by about $10.9 million, or 5.6 percent, for the three months ending June 30, 2014. The company said in the filing its audit committee believed certain financial errors “were intentionally made,” and that they were “intentionally not corrected,” according to the article.

[Some additional reading: ARCP’s stock fell another 5.8 percent to $9.42 on Thursday, according to a Bloombergarticle.]

Various tax benefits increase in 2015 due to inflation adjustments
For tax year 2015, the IRS announced on Thursday annual inflation adjustments for more than 40 tax provisions, including the tax rate schedules, and other tax changes.

The tax agency issued Revenue Procedure 2014-61, which explains the inflation adjustments in greater detail.

The tax items for 2015 of great interest to most taxpayers include the following dollar amounts:

  • The tax rate of 39.6 percent affects single filers whose income exceeds $413,200; $464,850 for married taxpayers filing a joint return. This is up from $406,750 and $457,600, respectively, for tax year 2014. The other marginal rates – 10, 15, 25, 28, 33, and 35 percent – and the related income tax thresholds are described in the revenue procedure.
  • The standard deduction rises to $6,300 for single filers and married persons filing separate returns, and $12,600 for married couples filing jointly, up from $6,200 and $12,400, respectively. The standard deduction for heads of household rises to $9,250, up from $9,100.
  • The limitation for itemized deductions to be claimed on tax year 2015 returns of individuals begins with incomes of $258,250 or more ($309,900 for married couples filing jointly).
  • The personal exemption for tax year 2015 rises to $4,000, up from the 2014 exemption of $3,950. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $258,250 ($309,900 for married couples filing jointly). It phases out completely at $380,750 ($432,400 for married couples filing jointly).
  • The alternative minimum tax (AMT) exemption amount for tax year 2015 is $53,600 ($83,400 for married couples filing jointly). The 2014 AMT exemption amount was $52,800 ($82,100 for married couples filing jointly).
  • The 2015 maximum earned income credit amount is $6,242 for taxpayers filing jointly who have three or more qualifying children, up from a total of $6,143. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds, and phase-outs.
  • Estates of decedents who die during 2015 have a basic exclusion amount of $5.43 million, up from a total of $5.34 million for estates of decedents who died in 2014.
  • For 2015, the exclusion from tax on a gift to a spouse who is not a US citizen is $147,000, up from $145,000.
  • For 2015, the foreign earned income exclusion breaks the six-figure mark, rising to $100,800, up from $99,200.
  • The annual exclusion for gifts remains at $14,000 for 2015.
  • The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements rises to $2,550, up $50 dollars from 2014’s amount.
  • Under the small business healthcare tax credit,  the maximum credit is phased out based on the employer’s number of full-time equivalent employees in excess of 10 and the employer’s average annual wages in excess of $25,800 for tax year 2015, up from $25,400.

Hungarian Premier Orban scraps Internet tax amid protests
Zoltan Simon of Bloombergreported on Friday that Hungarian Prime Minister Viktor Orban suspended plans to introduce the world’s first Internet tax, bowing to pressure after tens of thousands of people protested at rallies across the eastern European Union member.

“Whatever the government’s intention was, this tax simply can’t be introduced,” Orban told state radio on Friday, according to the article. He added that he wanted instead to hold “national consultations” on the issue next year. “We want to govern with the people.”

The plan sparked two of the biggest rallies against Orban’s administration since he returned to power in 2010, Simon wrote. The rallies widened into anti-government protests, with demonstrators criticizing perceived state corruption and power centralization. Orban’s intention to reopen the issue next year on the Internet tax issue signals he’s unlikely to give up on his tax plan, said Jozsef Tobias, head of the opposition Socialist Party, according to MTI state news service.

The government planned to impose a levy of 150 forint ($0.62) per gigabyte, which the ruling party later agreed to cap at 700 forint a month for household users and 5,000 forint for companies. Orban said his aim was to extend an existing levy on the telecommunications industry, which includes a tax on phone calls and text messages. He conceded that’s not what people saw, according to the article.

Governments would disclose information on tax abatements under GASB proposal
The Governmental Accounting Standards Board (GASB) on Friday issued for public comment an exposure draft, Tax Abatement Disclosures, that would require for the first time state and local governments to disclose information about property and other tax abatement agreements.

According to the GASB, governments generally agree to abate or reduce the taxes of businesses and other taxpayers to promote economic development, job growth, redevelopment of blighted or underdeveloped areas, and other actions that are beneficial to the government or its citizens.

Many state and local governments currently have tax abatement programs in place, and the effects of tax abatements on their financial health and ability to raise revenue can be substantial. However, GASB officials said it is difficult to discern the magnitude and nature of those effects from financial statements at present.

The disclosure requirements proposed by the GASB are designed to provide financial statement users with essential information about these programs. Specifically, the proposed tax abatement disclosure requirements would include:

  • General descriptive information, such as the tax being abated, criteria that must be met for the taxpayer to be eligible for the abatement, provisions for recapturing abated taxes, and the types of commitments made by tax abatement recipients.
  • Number of tax abatement agreements.
  • Dollar amount of taxes abated.
  • Other commitments made by a government, such as to build infrastructure assets.

“Tax abatements can significantly reduce the amount of revenue a government receives,” GASB Chairman David Vaudt said in a written statement. “But in many cases, little is known publicly about their total size or their terms and conditions. What the board has proposed would make the financial impact of these transactions much more transparent.”

The proposed guidance addresses tax abatements resulting from agreements entered into by the reporting government, as well as those initiated by other governments that reduce the reporting government’s tax revenues.

Stakeholders are encouraged to review the proposals and provide comments by Jan. 30, 2015.

PwC: Nearly 60% of IPOs used non-GAAP measures during past three years
Close to 60 percent of initial public offerings (IPOs) over the past three years used at least one non-US Generally Accepted Accounting Principles (GAAP) measure in their financial statements, with 65 percent of those filings focusing on earnings before interest, income taxes, depreciation, and amortization (EBITDA) measures, according to a new report released on Wednesday by PwC US.

“Management teams, investors, regulators, and ratings agencies are keenly focused on non-GAAP measures and how they are being used by new equity issuers,” Neil Dhar, PwC’s US capital markets leader, said in a written statement. “As companies prepare for an IPO, among the many choices they must make is how to utilize non-GAAP measures in their filings and in their communications with potential investors. Non-GAAP measures provide meaningful insight into a company’s liquidity, cash flow, and operating performance, and using the right non-GAAP measures can help new issuers highlight key facts and circumstances to positively position themselves to the investment community.”

The report, How non-GAAP Measures Can Impact Your IPO, includes findings from an analysis of more than 400 IPOs completed between 2011 and 2013 to provide a detailed look at the various types on non-GAAP measures used over that period.

PwC’s research showed that adjusted EBITDA non-GAAP measures appeared in 46 percent of reviewed filings. Of those, more than 70 percent included an adjustment for stock, share, or other equity-based compensation. Other common EBITDA adjustments related to impairment (33 percent), acquisition (20 percent), and restructuring and reorganization impacts (15 percent).

PwC also identified a wide diversity in EBITDA adjustments made by companies, noting that 80 percent of the filings included at least one unique adjustment, which ranged from management fees to accretion charges to income or losses from discontinued operations.

After adjusted EBITDA, other common non-GAAP measures in the financial statements analyzed included EBITDA (19 percent), adjusted net income (9 percent), free cash flow (4 percent), and adjusted gross profits (4 percent).

“Companies should be ready to enter the IPO markets while the window is open, and having their financial reporting in order from the start is a key factor in the process,” said Mike Gould, PwC’s US public offerings leader. “While non-GAAP measures are a key tool for companies planning to enter the public market, it is a complex process that must be thought through objectively to avoid potential missteps, unanticipated costs, and delays in their offerings.”

BDO USA: CEO and CFO compensation sees substantial boost from last year
CEO compensation across eight industries jumped 12.6 percent from FY 2012 to FY 2013, while CFO compensation also climbed 8.2 percent during the same time period, according to an analysis of 600 mid-market public companies conducted by BDO USA LLP.

Despite notable compensation increases across both C-suite functions, the boss still makes a lot more money: Total average CEO compensation is $3,034,366 compared to $1,158,664 for CFOs, according to the 2014BDO 600 CEO and CFO Pay Study.

“Executive compensation levels and structures are often directly tied to national and global economic conditions. The percentage increases for both CEO and CFO compensation this year support the theory that the Great Recession is behind us, and businesses are once again investing in top executive talent,” Randy Ramirez, a senior director in the Global Employer practice at BDO, said in a written statement. “As anticipated, however, in stronger markets, companies are favoring pay-at-risk compensation programs, which directly tie executive compensation to company performance. This is especially true for CEOs who are receiving 60 percent or more of their compensation in the form of equity.”

The study examined CEO and CFO compensation trends in publicly traded companies with annual revenues ranging from $25 million to $1 billion in the energy, healthcare, manufacturing, real estate, retail, and technology industries, as well as publicly traded companies with assets ranging from $50 million to $2 billion in the banking and financial services industries. The study included proxy statements that were filed between May 15, 2013, and May 15, 2014.

On average, chief executives at companies in the largest revenue group ($650 million to $1 billion) receive a total direct compensation of $3,355,050, up from the $2,824,121 average total direct compensation amount for CEOs in the smallest revenue group ($25 million to $325 million).

The same is true for CFO compensation, with those in the highest revenue category receiving an average of $1,248,338 in overall direct compensation and an average of $1,006,746 in total direct compensation in the smallest revenue range.

However, the smallest revenue category for CEOs experienced a substantial 39 percent increase in compensation, significantly larger than the respective 8 percent and 3 percent growth rates that CEOs within the middle revenue group ($325 million to $650 million range) and largest revenue group experienced, according to the study. For CFO compensation, this also holds true: Compensation for CFOs at companies in the smallest and middle revenue groups grew 15 percent and 10 percent, respectively. However, CFO compensation in the largest revenue group only grew 1 percent over FY 2012.

BDO USA found that on average, CEOs in the energy industry receive the highest compensation out of all the surveyed industries ($5,129,630), with a 45 percent increase from the previous year. This represents a significant change from the past two years, during which real estate CEOs had held the rank of highest total compensation. Similarly, the highest paid CFOs are also in the energy industry, with average compensation at $1,788,635, a 21 percent increase from the previous year, according to the study.

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