Helpful Accounting Tips
Are you acquiring a group of assets or a business?
The question you should ask yourself when purchasing a group of assets is if those assets may actually be a business that you are acquiring. If those assets have the ability to produce outputs and provide a return to you those assets may constitute a business. The FASB has three elements in defining a business. Per FASB 805 “business combination” the three elements are as follows:
Any economic resource that creates, or has the ability to create, outputs when one or more processes are applied to it. Example the ability to obtain access to necessary materials or rights, and employees.
Any system, standard, protocol, convention, or rule that when applied to an input or inputs, creates or has the ability to create outputs. Examples include strategic management processes, operational processes and resource management processes. These processes typically are documented, but an organized workforce having the necessary skills and experience following rules and conventions may provide the necessary processes that are capable of being applied to inputs to create outputs. Accounting, billing, payroll and other administrative systems typically are not processes used to create outputs.
The result of inputs and processes applied to those inputs that provide or have the ability to provide a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants.
Although businesses usually have outputs, outputs are not required for an integrated set to qualify as a business.
If you purchase assets and it appears to have the first two elements noted above, please consult with us on the appropriate accounting treatment. There is a big difference when treating an asset as a business versus an asset purchase. The accounting of goodwill, contingencies and transaction cost are treated differently between a business acquisition compared to an asset purchase. We can help guide you through the appropriate accounting treatment.
Bank waivers for covenant violations and what you need to be aware of
From time to time we have seen companies obtain bank waivers on covenant violations in order for them not to record their debt as current due to the covenant violations. The misconception that companies have with respect to a bank waiver is that it does not necessary mean that your debt will automatically be classified as long term. The FASB indicates that even with a waiver the company needs to assess that they will not violate the same covenant over the next fiscal year. If the company receives a waiver and they expect to violate the covenant over the next fiscal year then the debt will be classified as current.
Therefore, companies with potential covenant violations in which they do not believe they will meet the covenant again within the next fiscal year should obtain a loan amendment, as opposed to a waiver, since the waiver would not help cure the classification of debt from current to long term. If you have this situation, please speak with us as early as possible.
There has been an increase in barter transactions over the past year. The common error that we have come across is when companies do not record the expenses and revenues associated with the exchange of goods and services. There is a thought that such exchanges, since they are nonmonetary, should not be included in the financial statements. Under FASB auditing standards, the fair value of those goods and services should be recorded in the financial statements. The fair value that should be used is the fair value of the services that the company performed to obtain the other services or goods.
When dealing with goods, the FASB requires that the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is the fair value of the asset surrendered to obtain it, and a gain or loss be recognized on the exchange. The fair value of the asset received would be used to measure the cost if it is more clearly evident than the fair value of the asset surrendered.