Monthly Archives: October 2017

Is Your Company’s Retirement Plan as Good as It Could Be?

Many retirement plans need refining. Others need to avoid conflicts with Department of Labor rules.

Provided by Dane A. Wilson, Wealth Management Advisor

DaneWilson-01 smaller2At times, running your business takes every ounce of energy you have. Whether you have a human resources officer at your company or not, creating and overseeing a workplace retirement plan takes significant effort. These plans demand periodic attention.

As a plan sponsor, you assume a fiduciary role. You accept a legal responsibility to act with the best financial interests of others in mind – your retirement plan participants and their beneficiaries. You are obligated to create an investment policy statement (IPS) for the plan, educate your employees about how the plan works, and choose the investments involved. That is just the beginning.1

You must demonstrate the value of the plan. Your employees should not merely shrug at what you are offering – a great opportunity to save, invest, and build wealth for the future. Financial professionals know how to communicate the importance of the plan in a user-friendly way, and they can provide the education that “flips the switch” and encourages worker participation. If this does not happen, your employees may view the plan as just an option instead of a necessity as they save for retirement.

You must monitor and benchmark investment performance and investment fees. Some plans leave their investment selections unchanged for decades. If the menu of choices lacks diversity, if the investment vehicles underperform the S&P 500 year after year and have high fees, how can this be in the best interest of the plan participants?

You must provide enrollment paperwork and plan notices in a timely way. Often, this duty falls to a person that has many other job tasks, so these matters get short shrift. The plan can easily fall out of compliance with Department of Labor rules if these priorities are neglected.

You must know the difference between 3(21) and 3(38) investment fiduciary services. The numbers refer to sections of ERISA, the Employment Retirement Income Security Act. Most investment advisors are 3(21) – they advise the employer about investment selection, but the employer makes the final call. A 3(38) investment advisor has carte blanche to choose and adjust the plan’s investments – and he or she needs to be overseen by the plan sponsor.2

To avoid conflicts with the Department of Labor, you should understand and respect these requirements and responsibilities. Beyond the basics, you should see that your company’s retirement plan is living up to its potential.

We can help you review your plan and suggest ways to improve it. An attractive retirement plan could help you hire and hang onto the high-quality employees you need. Ask us about a review, today – you need to be aware of your plan’s mechanics, fees, and performance, and you could face litigation, fines, and penalties if your plan fails to meet Department of Labor and Internal Revenue Service requirements.

Dane A. Wilson may be reached at 216-831-7171 or dwilson@cp-advisors.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Securities offered through 1st Global Capital Corp., Member FINRA/SIPC

Investment returns fluctuate and there is no assurance that a single rate of return will be sustained over an extended period of time. Investments are subject to market risks including the potential loss of principal invested

 
Citations.
1 – cnbc.com/2017/08/23/qualified-retirement-plan-sponsors-are-fiduciaries.html [8/23/17]
2 – tinyurl.com/ycrqheey [4/7/17]

 

Ready for the new not-for-profit accounting standard?

A new accounting standard goes into effect starting in 2018 for churches, charities and other not-for-profit entities.

Here’s a summary of the major changes:

Group of people around the worldNet asset classifications
The existing rules require not-for-profit organizations to classify their net assets as either unrestricted, temporarily restricted or permanently restricted. But under Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, there will be only two classes: net assets with donor restrictions and net assets without donor restrictions.

The simplified approach recognizes changes in the law that now allow organizations to spend from a permanently restricted endowment even if its fair value has fallen below the original endowed gift amount. Such “underwater” endowments will now be classified as net assets with donor restrictions, along with being subject to expanded disclosure requirements. In addition, the new standard eliminates the current “over-time” method for handling the expiration of restrictions on gifts used to purchase or build long-lived assets (such as buildings).

Other major changes
The new standard includes specific requirements to help financial statement users better assess a nonprofit’s operations. Specifically, organizations must provide information about:

Liquidity and availability of resources. This includes qualitative and quantitative  disclosures about how they expect to meet cash needs for general expenses within one  year of the balance sheet date.

Expenses. The new standard requires all not-for-profit entities to report expenses by  both function (which is already required) and nature in one location. In addition, it calls  for enhanced disclosures regarding specific methods used to allocate costs among  program and support functions.

 Investment returns. Organizations will be required to net all external and direct internal  investment expenses against the investment return presented on the statement of  activities. This will facilitate comparisons among different not-for-profit entities,  regardless of whether investments are managed externally (for example, by an outside  investment manager who charges management fees) or internally (by staff).

Additionally, the new standard allows not-for-profit entities to use either the direct or indirect method to present net cash from operations on the statement of cash flows. The two methods produce the same results, but the direct method tends to be more understandable to financial statement users. To encourage not-for-profits to use the direct method, entities that opt for the direct method will no longer need to reconcile their presentation with the indirect method.

To be continued
ASU 2016-14 is the first major change to the accounting rules for not-for-profits since 1993. However, it’s only phase one of a larger project to enhance financial reporting transparency for donors, grantors, creditors and other users of not-for-profits’ financial statements.

Our best advice is: “Don’t go it alone.” If you have questions, contact Michael B. Klein, CPA, MBA, Ciuni & Panichi, Inc. Partner who leads the Not-for-Profit Group at 216-831-7171 or mklein@cp-advisors.com.

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Putting Hedging Strategies to Work for Your Business

Hedging Strategies

Discussing business graphsThe Financial Accounting Standards Board (FASB) recently issued some targeted improvements to its guidance that could encourage more companies to engage in hedging arrangements to minimize volatility in their financial statements. Here’s a close-up on how businesses can hedge price fluctuations and why businesses and their investors alike approve of the changes to the hedge accounting rules.

Hedging
Some costs — such as interest rates, exchange rates and commoditized raw materials — are subject to price fluctuations based on changes in the external markets. Businesses may try to “hedge” against volatility in earnings, cash flow or fair value by purchasing derivatives based on those costs.

If futures, options and other derivative instruments qualify for hedge accounting treatment, any gains and losses are generally recognized in the same period as the costs are incurred. But hedge accounting is a common source of confusion (and restatements) under U.S. GAAP.

To qualify for the current hedge accounting rules, a transaction must be documented at inception and be “highly effective” at stabilizing price volatility. In addition, businesses must periodically assess hedging transactions for their effectiveness.

Simplification
In August 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The updated standard expands the range of transactions that qualify for hedge accounting and simplifies the presentation and disclosure requirements.

Notably, the update allows for hedging of nonfinancial components that are contractually specified and adds the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate to the list of acceptable benchmarks for fixed interest rate hedges.

ASU 2017-12 also eliminates the requirement to measure and report hedge “ineffectiveness.” That’s the amount the hedge fails to offset the hedged item.

Instead of reporting hedge ineffectiveness separately for cash flow hedges, the entire change in value of the derivative will be recorded in other comprehensive income and reclassified to earnings in the same period in which the hedged item affects earnings. Companies might still mismatch changes in value of a hedged item and the hedging instrument under the new standard, but they won’t be separately reported.

Universal support
Businesses, investors and other stakeholders universally welcome the changes to the hedge accounting rules. Although the updated standard goes into effect in 2019 for public companies and 2020 for private ones, many businesses that use hedging strategies are expected to adopt it early — and the FASB has hinted that the changes might encourage more companies to try hedging strategies.

Could hedging work for your business? If you have questions, contact George Pickard, CPA, MSA, Ciuni & Panichi, Inc. Senior Manager, at gpickard@cp-advisors.com or 216-831-7171 to discuss your options.

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Risk Management Framework

Risk Management Framework Maximizes Upsides

How effectively do you manage risk?

Risk and reward balanceBusinesses can’t eliminate risk, but they can manage it to maximize the entity’s economic return. A new framework aims to help business owners and managers more effectively integrate ERM practices into their overall business strategies.

A five-part approach is advisable
On September 6, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) published Enterprise Risk Management — Integrating with Strategy and Performance. You can use the updated framework to develop a more effective risk management strategy and to monitor the results of your ERM practices.

The updated framework discusses ERM relative to the changes in the financial markets, the emergence of new technologies and demographic changes. It’s organized into five interrelated components:

  1. Governance and culture. This refers to a company’s “tone at the top” and oversight function. It includes ethics, values and identification of risks.
  2. Strategy and objective setting. Proactive managers align the company’s appetite for risk with its strategy. This serves as the basis for identifying, assessing and responding to risk. By understanding risks, management enhances decision making.
  3. Performance. Management must prioritize risks, allocate its finite resources and report results to stakeholders.
  4. Review and revision. ERM is a continuous improvement process. Poorly functioning components may need to be revised.
  5. Information, communication and reporting. Sharing information is an integral part of effective ERM programs.

COSO Chair Robert Hirth said in a recent statement, “Our overall goal is to continue to encourage a risk-conscious culture.” He also said that the updated framework is not intended to replace COSO’s Enterprise Risk Management — Integrated Framework. Rather, it’s meant to reflect how the practice of ERM has evolved since 2004.

New insights
The updated framework clarifies several misconceptions from the previous version. Specifically, effective ERM encompasses more than taking an inventory of risks; it’s an entity-wide process for proactively managing risk. Additionally, internal control is just one small part of ERM; ERM includes other topics such as strategy setting, governance, communicating with stakeholders and measuring performance. These principles apply to all business levels, across all business functions and to organizations of any size.

Moreover, the update enables management to better anticipate risk so they can get ahead of it, with an understanding that change creates opportunities — not simply the potential for crises. In short, it helps increase positive outcomes and helps reduce negative surprises that come from risk-taking activities.

ERM in the future
Our advice is, “Don’t go it alone.” We can help you identify and optimize risks in today’s complex, volatile and ambiguous business environment. We’re familiar with emerging ERM trends and challenges, such as dealing with prolific data, leveraging artificial intelligence and automating business functions. Contact Reggie Novak, CPA, CFE, Ciuni & Panichi, Inc. senior manager, at 216.831.7171 or rnovak@cp-advisors.com for help adopting cost-effective ERM practices to help make your business more resilient and keep your business protected.

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Thinking about Outsourcing Payroll?

Protect your Payroll and Ask for a Service Audit Report

Business People Meeting Communication Working Office ConceptPayroll can be an administrative nightmare if done in-house, especially for smaller companies. In addition to keeping up with employee withholdings and benefits enrollment, you must file state and federal payroll tax returns and follow union reporting requirements. Outside service companies that specialize in payroll administration can help you manage all of the details and minimize mistakes. Payroll providers can also handle expense reimbursement for employees and provide other services.

When payroll is outsourced, however, your company could be exposed to identity theft and other fraud risks if the service provider lacks sufficient internal controls. For example, sensitive electronic personal data could be hacked from your network and sold on the Dark Net — or old-fashioned paper files could be stolen and used to commit fraud.

Audits of payroll companies
Fortunately, CPAs offer two types of reports that provide assurance on whether an outside payroll provider’s controls over paper and electronic records are adequate.

Type I Audits.  This level of assurance expresses an opinion as to whether controls are properly designed.

Type II Audits.  Here, the auditor goes a step further and expresses an opinion on whether the controls are operating effectively.

When performing these attestation engagements, Statement on Standards for Attestation Engagements (SSAE) No. 18 requires:

  • The payroll company’s management to provide a written assertion about the fairness of the presentation of the description of the organization’s control objectives and related controls and the suitability of their design; and for a Type II audit, the operating effectiveness of those control objectives and related controls,
  • The auditor’s opinion in a Type II audit regarding description and suitability to cover a period consistent with the auditor’s tests of operating effectiveness, rather than being as of a specified date, and
  • Auditors to identify in the audit report any tests of control objectives and related controls conducted by internal auditors.

Further, auditors are prohibited from using evidence on the satisfactory operation of controls in prior periods as a basis for a reduction in testing in the current period, even if it’s supplemented with evidence obtained during the current period.

When an audit is complete, the service auditor typically will issue a report to the payroll company.

As the customer of the service provider, it is then up to you to obtain a copy of the audit report from the payroll provider and distribute it to your financial statement auditors as evidence of internal controls.

Outsourcing with confidence
Your financial statement auditors are required to consider the internal control environment for any services you outsource, including payroll, customer service, benefits administration and IT functions. Most service providers obtain service audit reports. If yours doesn’t, you might need to request permission for your CPA to contact and visit the payroll provider to plan their financial statement audit.

The best advice we can offer is:  Don’t go it alone.  Contact Robert Smolko, CPA, Ciuni & Panichi, Inc. audit partner, at 216-831-7171 or rsmolko@cp-advisors.com for sound advice when making decisions about your business.

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Close-up on restricted cash