Take Your Own Advice

Many larger companies and firms implement an annual salary treatment process, so all salaries are adjusted at the same time every year no matter when you were hired. In some companies, this occurs in the fall and others in the spring. My employer adjusts salaries every spring, March to be exact. As I eagerly anticipate seeing what change is in store for me, I started thinking of advice we often give others when asked about financial matters.

  1. Getting a raise is the perfect time to increase your contributions to a 401(k) or other retirement savings. Taking a portion of the raise means you’ll never miss the increased contribution because you were never getting the extra money in the first place.
  2. If you’re already maxing out the tax advantaged contribution to a 401(k), consider switching a higher portion of your contribution to a Roth 401(k) if that’s available from your employer. The increase in salary can be used to offset the higher taxes you pay now but will give you the ability to earn a tax-free return on those contributions forever.
  3. If you’re maxing out your Roth contributions or you do not have that option, consider increasing your contributions to a Health Savings Account (HSA), if you’re eligible. You can contribute to an HSA if you participate in a high deductible medical insurance plan. The magic of an HSA is that contributions are made tax free, earnings are tax free and withdrawals for medical expenses are also tax free. There is no better way to save.
  4. If you’re already maxing out your HSA, consider putting a portion of your salary increase away for current medical expenses and don’t touch your HSA for those costs. Instead, save your HSA for retirement. As long as you use the withdrawals for medical expenses, it’s a better tax deal than a Roth or regular 401(k), and according to every prediction I see, we’ll all need plenty of money to cover medical expenses in our retirement.

Finally, if you’re doing all of the above, then consider taking a well-deserved vacation with your extra income, because you’re already well on your way to a secure future.

Thoughts on Kobe Bryant

The sad news that Kobe Bryant recently passed away along with his daughter in a helicopter crash reminded me of a blog I wrote a few years ago when Kobe set the NBA record for missed field goal attempts. As noted in the blog below entitled Failure is an Option, Kobe’s greatness was not only the number of points he scored or the longevity of his career, but his willingness to risk failure time and time again in an effort to succeed.

The blog was written when Kobe was still playing. His final career stats included making 11,719 field goals and missing 14,481 out of 26,200 attempts for a 44.7% lifetime field goal percentage.

Failure is an Option (A Tribute to Kobe Bryant)

It was a big deal last week when Kobe Bryant became the all-time leader in missed field goal attempts in the NBA. As of this writing, he had missed 13,421 field goal attempts and counting. But there is a big problem with focusing on that “negative” supremacy. The real point (pun intended) is that it takes failing that many times to also make 11,121 field goals and be considered one of the best to ever play the game. A .453 lifetime field goal percentage for a guard is phenomenal. You have to fail 13,421 times to succeed 11,121 times.

If we don’t risk failure, we will never achieve success. Kobe Bryant has risked failure 24,542 times. That is 32 times for every hour he plays. How many times have you risked failure in the past 40-hour week you worked – was it 1,280 times like Kobe? We like to tell our kids that sports teach a lot of life lessons. Maybe the most important lesson is that you have to take risks in order to succeed.

Why You Should Care About This IFRS Proposal

Unless you work for a subsidiary of a foreign company reporting under International Financial Reporting Standards (IFRS), most U.S. based CPAs generally feel there is little reason to pay attention to IFRS activities. Therefore, many of you probably missed the release of a proposed change to the standard on general presentation and disclosures in a financial report in the middle of December. However, this standard is one you might want to pay attention to, because it may push the Financial Accounting Standards Board (FASB) to tackle some similar issues in the U.S. Some key highlights from the standard include:

  • Required subtotals in the Income Statement, including Operating Profit which, unless the entity is a bank or similar financial services company, will generally exclude interest expense and interest income. Even interest income on customer receivables will be excluded unless you conclude a principle function of your business is to provide customer financing.
  • The disclosure of unusual items in the footnotes to the financial statements. Unusual is defined as unusual in occurrence or unusual in amount. And the proposed disclosures allow companies to show the impact of these items on the Income Statement, so you essentially get to include the “normalization” for such items in the audited financial statements.
  • The disclosure of “management performance measures” in footnotes defined as amounts:
    • Used in public communications outside financial statements,
    • Complementing totals or subtotals specified by IFRS standards, and
    • Communicating management’s view of an aspect of an entity’s financial performance to users of financial statements.

The disclosure will include information on how the management performance measure is calculated, how it reconciles back to the most similar IFRS total or subtotal, and how management believes it (better) portrays a financial aspect of the business.

  • The movement of all interest expense into the financing section of the cash flow statement, and interest and dividends received into the investing section. This means such amounts will no longer be included in the operating section of cash flows for most (non-financial services) companies.

The standard provides a lot of opportunity for companies to better tell their stories in the financial statements, but with that comes a price. The disclosures become part of the financial statements subject to auditing procedures if an audit is obtained on the financial statements. Whether or not you want to send comments on the IFRS is your choice, but this proposed standard may be one worth taking a look at to see potential changes that FASB might consider in the future.

New Year’s Resolutions

After last year’s soapbox, I thought it would be good to get back to a simple top 10 list à la David Letterman (showing my age to those younger readers). So, without further fanfare, here is my list of resolutions all CPAs make and then quickly break each new year.

After last year’s soapbox, I thought it would be good to get back to a simple top 10 list à la David Letterman (showing my age to those younger readers). So, without further fanfare, here is my list of resolutions all CPAs make and then quickly break each new year.

10. I will take some CPE every month so that by the time my birthday or the end of the year rolls    around, I will already comply with my state’s CPE requirements.

9. I will reread my emails before I send them out to make sure they are free from silly mistakes and typos.

8. I will give timely feedback to my staff when they do something well or need to improve.

7. I will incorporate exercise into my schedule, even if it is just a 20-minute walk at lunch, each day no matter how busy I am.

6. I will say no to a new project, client or request for my time at least once a month.

5. I will not look at email at least one whole day while I am on vacation.

4. I will spend 15 minutes at the end of each day clearing my desk and planning so I can start the next day productively.

3. I will eat lunch with someone else at least twice each week. Maybe I can also hit Resolution #7 by walking to lunch with the person!

2. I will not multitask during conference calls so I know what is said and don’t have to ask people to repeat the question.

1. I will not wish ill will on the members of FASB despite having to deal with the new CECL standard!

What other resolutions do CPAs need to make and which ones do you think we will be able to keep this year?

Why Ethics CPE is Required

I recently sat through my required four hours of ethics continuing education to meet the biennial requirement for licensure in Texas. While every state requires some amount of continuing education to maintain a CPA license, some states go further and specifically require a certain portion of the continuing education hours cover ethical issues. As the instructor covered actual dilemmas faced by CPAs and actual frauds committed by CPAs and non-CPAs alike, my mind wandered a bit into why I was required to take this course in the first place. My thought was, I have high integrity; I would never do what these criminals did, and I know where and how to look for fraud. I am an internal auditor after all!

Then the stories turned to average people who started down a path that seemed appropriate. They were trying to help the company and protect people’s jobs. These people didn’t realize they were in over their head until the riptide of circumstances had pulled them so far out to sea, they could never get back to shore on their own. That is when I realized we take ethics regularly for two reasons.

First, most of us are fortunate enough to rarely be faced with true ethical dilemmas. While ethics is like riding a bike, you never completely forget, taking on those dilemmas is not for the novice and the training keeps our senses sharp for the potential situations when they arise. Second, we are there for our fellow CPAs. The requirement to think about ethics means thinking about our duty to the public and our fellow professionals. We are trusted because the whole profession is trusted. We nearly lost that trust a couple of decades ago with the Enron and WorldCom disasters. It took us years to get that trust back.

We are, once again, one of the most trusted professions in the world. If sitting through a few hours of ethics every two years means just one CPA stands up early enough to prevent a company from going off the rails and costing investors billions of dollars, then those hours of my time are well worth it.

How I Became a CPA

My story started at Thanksgiving 36 years ago. Like many, my parents had friends over for Thanksgiving dinner. While Mom and others were in the kitchen making the food, I was watching the Macy’s parade and football in the family room. One of our guests came in, an accounting professor, and started a conversation with me. I was a senior in high school, so he asked where I was thinking of going to college (early admission was not a big deal in the early ‘80s) and what I wanted to do. I told him I wasn’t sure about the college, but that I would probably work to become a doctor.

He asked why a doctor? I said because becoming a doctor is hard to do and doctors help lots of people. He then asked if I would consider a profession that would get me out of school in half the time and still help lots of people. I said sure – but what kind of profession is that? That was when I heard about the CPA profession for the first time. He told me how CPAs help take care of all sorts of investors, from people making their own investments to people participating in pension plans (remember, this was the ‘80s and lots of people had pensions) and so forth.

I quickly realized that CPAs provided the trust that greased the wheels of the economy. I figured becoming a CPA was hard, but worth the effort. I also liked math a lot and thought that is what CPAs did (OK, that is the topic of a whole different blog, but suffice it to say, I was mistaken) and didn’t mind not having to deal with knives and blood. I took the professor’s advice and decided to major in accounting.

So, during the holidays ask that high school junior or senior at your friend’s or family’s house what they plan to major in. You never know – maybe you will change the course of someone’s life.

FinREC Serving the Profession

The last Financial Reporting Executive Committee (FinREC) meeting of the year was held on November 5. The meeting covered a number of topics, including:

  • Long-duration insurance contracts
  • Current expected credit losses
  • Digital assets

I think the best way to put the proposed papers on long-duration insurance contracts is that if you are in that industry, you should pay attention; otherwise, the rest of you can take assurance that FinREC is there, so you don’t have to deal with these things. By the way, in case you are wondering, long-duration insurance contracts are things like life insurance and annuities that last many years, in some cases decades.

The current expected credit loss (CECL) topics included issues related to insurance, as well as trying to help define when information received after the balance sheet date is the result of a subsequent event or was simply a timing issue about getting information on events that occurred prior to the balance sheet date. The reason these issues matter is because the CECL standard is explicit that subsequent events are not to be considered when determining the expected losses to be included in the financial statements. By the way, you are going to have to wait for the release of the document from AICPA to find out what is a subsequent event that should be ignored and what isn’t (unless you want to dig up the SEC speech on the topic).

Finally, we continued our discussion on digital assets, which includes crypto assets like Bitcoin and Ethereum, as well as other token-based assets that represent ownership interests or other items. I’m sure you have seen by now that typical companies will need to account for crypto assets as intangible assets and not investments. But if the owning entity is an investment company following those specialized accounting rules, then crypto assets will be accounted for as investments. If that doesn’t seem fair, remember that investment companies get to treat other assets, like real estate and commodities (e.g., oil), as investments and use mark-to-market accounting on those, so unless you want to move your entire balance sheet to mark-to-market (i.e., fair value) accounting, maybe it’s not so unfair after all.

We hope you find the work of FinREC helpful. While not officially authoritative GAAP, FinREC is there to help connect the dots and provide consensus opinions about how to deal with questions that come up from new transactions or implementing new standards. We are a resource for the profession that I hope you find useful.