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What's in a name? A lot, if you manage a benefit plan.

01.18.21

This article is the first in a series to help employee benefit plan fiduciaries better understand their responsibilities and manage the risks of non-compliance with ERISA requirements.

On Labor Day, 1974, President Gerald Ford signed the Employee Retirement Income Security Act, commonly known as ERISA, into law. Prior to ERISA, employee pensions had scant protections under the law, a problem made clear when the Studebaker automobile company closed its South Bend, Indiana production plant in 1963. Upon the plant’s closing, some 4,000 employees—whose average age was 52 and average length of service with the company was 23 years—received approximately 15 cents for each dollar of benefit they were owed. Nearly 3,000 additional employees, all of whom had less than 10 years of service with the company, received nothing.

A decade later, ERISA established statutory requirements to preserve and protect the rights of employees to their pensions upon retirement. Among other things, ERISA defines what a plan fiduciary is and sets standards for their conduct.

Who is—and who isn’t—a plan fiduciary?
ERISA defines a fiduciary as a person who:

  1. Exercises discretionary authority or control over the management of an employee benefit plan or the disposition of its assets,
  2. Gives investment advice about plan funds or property for a fee or compensation or has the authority to do so,
  3. Has discretionary authority or responsibility in plan administration, or
  4. Is designated by a named fiduciary to carry out fiduciary responsibility. (ERISA requires the naming of one or more fiduciaries to be responsible for managing the plan's administration, usually a plan administrator or administrative committee, though the plan administrator may engage others to perform some administrative duties).

If you’re still unsure about exactly who is and isn’t a plan fiduciary, don’t worry, you’re not alone. Disagreements over whether or not a person acting in a certain capacity and in a specific situation is a fiduciary have sometimes required legal proceedings to resolve them. Here are some real-world examples.

Employers who maintain employee benefit plans are typically considered fiduciaries by virtue of being named fiduciaries or by acting as a functional fiduciary. Accordingly, employer decisions on how to execute the intent of the plan are subject to ERISA’s fiduciary standards.

Similarly, based on case law, lawyers and consultants who effectually manage an employee benefit plan are also generally considered fiduciaries.

A person or company that performs purely administrative duties within the framework, rules, and procedures established by others is not a fiduciary. Examples of such duties include collecting contributions, maintaining participants' service and employment records, calculating benefits, processing claims, and preparing government reports and employee communications.

What are a fiduciary’s responsibilities?
ERISA requires fiduciaries to discharge their duties solely in the interest of plan participants and beneficiaries, and for the exclusive purpose of providing benefits for them and defraying reasonable plan administrative expenses. Specifically, fiduciaries must perform their duties as follows:

  1. With the care, skill, prudence, and diligence of a prudent person under the circumstances;
  2. In accordance with plan documents and instruments, insofar as they are consistent with the provisions of ERISA; and
  3. By diversifying plan investments so as to minimize risk of loss under the circumstances, unless it is clearly prudent not to do so.

A fiduciary is personally liable to the plan for losses resulting from a breach of their fiduciary responsibility, and must restore to the plan any profits realized on misuse of plan assets. Not only is a fiduciary liable for their own breaches, but also if they have knowledge of another fiduciary's breach and either conceals it or does not make reasonable efforts to remedy it.

ERISA provides for a mandatory civil penalty against a fiduciary who breaches a fiduciary responsibility under ERISA or commits a violation, or against any other person who knowingly participates in such breach or violation. That penalty is equal to 20 percent of the "applicable recovery amount" paid pursuant to any settlement agreement with ERISA or ordered by a court to be paid in a judicial proceeding instituted by ERISA.

ERISA also permits a civil action to be brought by a participant, beneficiary, or other fiduciary against a fiduciary for a breach of duty. ERISA allows participants to bring suit to recover losses from fiduciary breaches that impair the value of the plan assets held in their individual accounts, even if the financial solvency of the entire plan is not threatened by the alleged fiduciary breach. Courts may require other appropriate relief, including removal of the fiduciary.

Over the coming months, we’ll share a series of blogs for employee benefit plan fiduciaries, covering everything from common terminology to best practices for plan documentation, suggestions for navigating fiduciary risks, and more.

Related Services

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Read this if you are a plan sponsor of employee benefit plans.

This article is the ninth in a series to help employee benefit plan fiduciaries better understand their responsibilities and manage the risks of non-compliance with Employee Retirement Income Security Act (ERISA) requirements. You can read the previous articles here

Employee benefit plan loan basics 

If your plan’s adoption agreement is set up to allow loans, participants can borrow against their account balance. Some participants may find this an attractive option as the interest they pay on the loan is returned to their retirement account as opposed to other loans where the interest is paid to the lender. 

Additionally, while interest is charged at the market rate, it may be lower than other options available to the participant, such as a credit card or other unsecured debt. Unlike hardship distributions, there are no restrictions on the circumstances under which a participant may take a loan. A potential downside is that if the borrower defaults on the loan or ends their employment and cannot repay the loan in full, it converts from a loan to a deemed distribution, potentially incurring taxes and penalties.

If a participant decides that an employee benefit plan loan is their best option, they will apply for the loan through your plan administrator. Loans are limited in both size and quantity. Participants may take loans up to 50% of their vested account balance with a maximum loan of $50,000. The provisions of a plan determine how many loans an employee may have at once; however, the combined loan balances cannot exceed 50% of the employee’s vested balance or $50,000. Furthermore, the $50,000 loan maximum must also consider payments made on loans within the previous 12 months.

Repayment of employee benefit plan loans

Repayment of employee benefit plan loans may be done through after tax payroll contributions, making it a relatively easy process for the participant. If a plan sponsor elects to provide this repayment option, they must ensure that repayments are remitted to the plan in a timely manner, just as they must with other employee funded contributions. The term of the loan is typically limited to five years and must be repaid in at least quarterly installments. However, a loan can be extended to as long as thirty years if specified within the plan’s loan policy. If the loan term is for longer than five years, the loan proceeds must be used to purchase a primary residence.

Like any source of debt, there are pros and cons to taking out an employee benefit plan loan, and it remains an important option for participants to understand. The benefits include the ease of applying for such a loan and loan interest that is then added to the participant’s retirement account balance. Potential pitfalls include lost earnings during the loan period and the risk of the loan becoming a deemed distribution if the participant is unable to repay within the allotted time. 

If you would like more information, or have specific questions about your specific situation, please contact our Employee Benefits Audit team.

Article
Retirement plan loans: A brief review

Editor's note: Read this if you are a leader in higher education.

The Department of Education has released guidance to colleges and universities on how the CARES Act grants to institutions, under the Higher Education Emergency Relief Fund (HEERF), may be used. The guidance comes in the form of answers to frequently asked questions, which we recommend institutions read before accepting the funds. Some key answers included in the document:

  1. A school has to participate in the HEERF funding to be used for grants to students to get the institutional share.
  2. Schools can use these funds to cover the costs of refunds for room and board provided as a result of campus closure.
  3. These funds can be used to make additional emergency financial aid grants to students impacted by campus closure.

We urge schools to retain supporting documentation of the proper use of these funds to allow for a compliance audit, should that be required. 

Questions?
Please contact Renee Bishop, Sarah Belliveau, or Mark LaPrade. We’re here to help.

Article
The Higher Education Emergency Relief Fund (HEERF): Guidelines

BerryDunn’s Healthcare/Not-for-Profit Practice Group members have been working closely with our clients as they navigate the effect the COVID-19 pandemic will have on their ability to sustain and advance their missions.

We have collected several of the questions we received, and the answers provided, so that you may also benefit from this information. We will be updating our COVID-19 Resources page regularly. If you have a question you would like to have answered, please contact Sarah Belliveau, Not-for-Profit Practice Area leader, at sbelliveau@berrydunn.com.

The following questions and answers have been compiled into categories: stabilization, cash flow, financial reporting, endowments and investments, employee benefits, and additional considerations.

STABILIZATION
Q: Is all relief focused on small to mid-size organizations? What can larger nonprofit organizations participate in for relief?
A:

We have learned that there is an as-yet-to-be-defined loan program for mid-sized employers between 500-10,000 employees. You can find information in the Loans Available for Nonprofits section (link below) of  the CARES Act as well as on the Independent Sector CARES Act web page, which will be updated regularly.

Q: Should I perform financial modeling so I can understand the impact this will have on my organization? Things are moving so fast, how do I know what federal programs are available to provide assistance?
A:

The first step in developing a short-term model to navigate the next few months is to gain an understanding of the programs available to provide assistance. These resources summarize some information about available programs:

Loans Available for Nonprofits in the CARES Act
Families First Coronavirus Response Act (FFCRA): FAQs for Businesses
CARES Act Tax Provisions for Not-for-Profit Organizations

The next step is to develop scenarios ranging from best case to worst case to analyze the potential impact of revenue and/or cost reductions on the organization. Modeling the various options available to you will help to determine which program is best for your organization. Each program achieves a different objective – for instance:

  • The Paycheck Protection Program can assist in retaining employees in the short term.
  • The Emergency Economic Injury Grants are helpful in covering a small immediate liquidity need.
  • The Small Business Debt Relief Program provides aid to those concerned with making SBA loan payments.

Additionally, consider non-federal options, such as discussing short-term deferrals with your current bank.

Q: How should I create a financial forecast/model for the next year?
A:

If you have the benefit of waiting, this is likely a time period in which it makes sense to delay significant in-depth forecasting efforts, particularly if your business environment is complicated or subject to significantly volatility as a result of recent events. The concern with beginning to model for future periods, outside of the next three-to-six months, is that you’ll be using information that is incomplete and ever-changing. This could lead to snap judgments that are short-term in nature and detrimental to long-term planning and success of your organization. 

With that said, we recognize that delaying this analysis will be unsettling to many CFOs and business managers who need to have a strategy moving forward. In developing this model for next year, consider the following elements of a strong model:

  1. Flexible and dynamic – Allow room for the model to adapt as more information is available and as additional insight is requested by your constituents (board members, department heads, lenders, etc.).
  2. Prioritize – Start with your big-ticket items. These should be the items that drive results for the organization. Determine what your top two to three revenue and expense categories are and focus on wrapping your arms around the future of those. From there, look for other revenue and expense sources that show correlation with one of the big two to three. Using a dynamic model, these should be automatically updated when assumptions on correlated items change. Don’t waste time on items that likely don’t impact decision making. Finally, build consensus on baseline assumptions, whether it be through management or accounting team, the board, or finance committee.
  3. Stress-test – Provide for the reality that your assumptions, and thus model, will be wrong. Develop scenarios that run from best-case to worst-case. Be honest with your assumptions.
  4. Identify levers – As you complete stress-testing, identify your action plan under different circumstances. What are expenditures that can be deferred in a worst-case scenario? What does staffing look like at various levels?
  5. Cash is king – The focus on forecasting and modeling is often on the net income of the organization and the cash flows generated. In a time such as this, the exercise is likely to focus on future liquidity. Remember to consider your non-income and expense items that impact cash flow, such as principal payments on debt service, planned additions to property & equipment, receipts on pledge payments, and others.  
CASH FLOW
Q: How can I alleviate cash flow strain in the near term?
A:

While the House and Senate have reacted quickly to bring needed relief to individuals and businesses across the country, the reality for most is that more will need to be done to stabilize. Operationally, obvious responses in the short term should be to eliminate all nonessential purchasing and maximize the billing and collection functions in accounts receivable. Another option is to utilize or increase an existing line of credit, or establish a new line of credit, to alleviate short term cash flow shortfalls. Organizations with investment portfolios can consider the prudence of increasing the spending draw on those funds. Rather than making a few drastic changes, organizations should take a multi-faceted approach to reduce the strain on cash flow while protecting the long term sustainability of the mission.

Q: How can I increase my organization’s reach to help with disaster relief? If we establish a special purpose fund, what should my organization be thinking about?
A:

Many organizations are looking for ways to increase their direct impact and give funding to individuals or organizations they may not have historically supported. For those who are want to expand their grant or gift making or want to establish a disaster relief fund, there are things to consider when doing so to help protect the organization. The nonprofit experts at Hemenway & Barnes share their thoughts on just how to do that.

FINANCIAL REPORTING
Q: What accounting standards have been delayed or are in the process of being delayed?
A:

FASB:
The $2.2 trillion stimulus package includes a provision that would allow banks the temporary option to delay compliance with the current expected credit losses (CECL) accounting standard. This would be delayed until the earlier end of the fiscal year or the end of the coronavirus national emergency.

GASB:
On March 26, 2020, the Governmental Accounting Standards Board (GASB) announced it has added a project to its current technical agenda to consider postponing all Statement and Implementation Guide provisions with an effective date that begins on or after reporting periods beginning after June 15, 2018. The GASB has received numerous requests from state and local government officials and public accounting firms regarding postponing the upcoming effective dates of pronouncements as these state and local government offices are closed and officials do not have access to the information needed to implement the Statements. Most notably this would include Statement No. 84, Fiduciary Activities, and Statement No. 87, Leases.

The Board plans to consider an Exposure Draft for issuance in April and finalize the guidance in May 2020.

ENDOWMENTS AND INVESTMENTS 
Q: What should I consider with regard to endowments?
A:

Many nonprofits with endowments are considering ways to balance an increased reliance on their investment portfolios with the responsibility to protect and preserve the spending power of donor-restricted gifts. Some things to think about include the existence (or absence) of true restrictions, spending variations under the Uniform Prudent Management of Institutional Funds Act (UPMIFA) applicable in your state, borrowing from an endowment, or requesting from the donor the release of restrictions. All need to be balanced with the intended duration and preservation of the endowment fund. Hemenway & Barnes shares their thoughts relative to the utilization of endowments during this time of need.

EMPLOYEE BENEFITS
Q: We are going to suspend our retirement plan match through June 30, 2020 and I picked a start date of April 1st. What we need help with is our bi-weekly payroll (which is for HOURLY employees). Their next pay date is April 3rd, for time worked through March 28th. Time worked March 29-31 would be paid on April 17th. How should we handle the match during this period for the hourly employees?
A:

The key for determining what to include for the matching calculation is when it is paid, not when it was earned. If the amendment is effective April 1st, then any amounts paid after April 1st would not have matching contributions calculated. This means that the amounts paid on April 3rd would not have any matching contributions calculated.

Q: Can you please provide guidance on the Families First Coronavirus Response Act (FFCRA) and how it may impact my organization?
A:

On March 30th, BerryDunn published a blog post to help answer your questions around the FFCRA.

If you have additional questions, please contact one of our Employee Benefit Plan professionals

ADDITIONAL CONSIDERATIONS
Q: I heard there was going to be an incentive for charitable giving in the new act. What's that all about?
A:

According to Sections 2204 and 2205 of the CARES Act:

  • Up to $300 of charitable contributions can be taken as a deduction in calculating adjusted gross income (AGI) for the 2020 tax year. This will provide a tax benefit even to those who do not itemize.
  • For the 2020 tax year, the tax cap has been lifted for:
    • Individuals-from 60% of AGI to 100%
    • Corporations-annual limit is raised from 10% to 25% (for food donations this is raised from 15% to 25%)
Q: Have you heard if the May 15th tax deadline will be extended?
A:

Unfortunately, we have not heard. As of April 6th, the deadline has not been extended.

Q: Could you please summarize for me the tax provisions in the CARES Act that you think are most applicable to not-for-profits?
A: Absolutely! Our not-for-profit tax professionals have compiled this document, which provides a high-level outline of tax provisions in the CARES Act that we believe would be of interest to our clients.

We are here to help
Please contact the BerryDunn not-for-profit team if you have any questions, or would like to discuss your specific situation.

Article
COVID-19 FAQs—Not-for-Profit Edition

Benchmarking doesn’t need to be time and resource consuming. Read on for four simple steps you can take to improve efficiency and maximize resources.

Stop us if you’ve heard this one before (from your Board of Trustees or Finance Committee): “I wish there was a way we could benchmark ourselves against our competitors.”

Have you ever wrestled with how to benchmark? Or struggled to identify what the Board wants to measure? Organizations can fall short on implementing effective methods to benchmark accurately. The good news? With a planned approach, you can overcome traditional obstacles and create tools to increase efficiency, improve operations and reporting, and maintain and monitor a comfortable risk level. All of this creates competitive advantage — and isn’t as hard as you might think.

Even with a structured process, remember that benchmarking data has pitfalls, including:

  • Peer data can be difficult to find. Some industries are better than others at tracking this information. Some collect too much data that isn’t relevant, making it hard to find the data that is.
     
  • The data can be dated. By the time you close your books for the year and data is available, you’re at least six months into the next fiscal year. Knowing this, you can still build year-over-year models you can measure consistently.
     
  • The underlying data may be tainted. As much as we’d like to rely on financial data from other organization and industry surveys, there’s no guarantee that all participants have applied accounting principles consistently, or calculated inputs (full-time equivalents), in the same way, making comparisons inaccurate.

Despite these pitfalls, it is a useful tool for your organization. It lets you take stock of your current financial condition and risk profile, identify areas for improvement and find a realistic and measurable plan to strengthen your organization.

Here are four steps to take to start a successful benchmarking program and overcome these pitfalls:

  1. Benchmark against yourself. Use year-over-year and month-to-month data to identify trends, inconsistencies and unexplained changes. Once you have the information, you can see where you want to direct improvement efforts.
  2. Look to industry/peer data. We’d love to tell you that all financial statements and survey inputs are created equally, but we can’t. By understanding the source of your information, and the potential strengths and weaknesses in the data (e.g., too few peers, different size organizations and markets, etc.), you will better know how to use it. Understanding the data source allows you to weigh metrics that are more susceptible to inconsistencies.
  1. Identify what is important to your organization and focus on it. Remove data points that have little relevance for your organization. Trying to address too many measures is one of the primary reasons benchmarking fails. Identify key metrics you will target, and watch them over time. Remember, keeping it simple allows you to put resources where you need them most.
  1. Use the data as a tool to guide decisions. Identify aspects of the organization that lie beyond your risk tolerance and then define specific steps for improvement.

Once you take these steps, you can add other measurement strategies, including stress testing, monthly reporting, use in budgeting, and forecasting. By taking the time to create and use an effective methodology, competitive advantage can be yours. Want to learn more? Check out our resources for not-for-profit organizations here.

Article
Benchmarking: Satisfy your board and gain a competitive advantage

Read this if you are a plan sponsor of employee benefit plans.

Employee Retention Credit (ERC)

There is still time to claim the Employee Retention Credit, if eligible. The due date for filing Form 941-X to claim the credit is generally three years from the date of the originally filed Form 941. 

The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to COVID-related governmental orders or that experienced a significant reduction in gross receipts. 

The amount of the credit can be substantial. For 2020, the credit is 50% of the first $10,000 of qualified wages per employee for the qualifying period beginning as early as March 12, 2020, and ending December 31, 2020 (thus the max credit per employee is $5,000 in 2020). For 2021, the credit is 70% of the first $10,000 of qualified wages per employee, per qualifying quarter (thus the potential max credit is $21,000 per employee in 2021). 

For 2021, employers with 500 or fewer full-time employees in 2019 may include all wages and health plan expenses as qualified wages. For 2020, employers with 100 or fewer full-time employees in 2019 may include all wages and health plan expenses as qualified wages while employers with more than 100 full-time employees in 2019 may only claim the credit for qualified wages paid to employees who did not provide services. For purposes of determining full-time employees, an employer only needs to include those that work 30 hours a week or 130 hours a month in the calculation. Part-time employees working less than this would not be considered in the employee count.

There is additional interplay between claiming the ERC and the wages used for PPP loan forgiveness that will need to be considered. 

Student loan repayment programs

One of the benefits younger employees would like to receive from their employer is assistance with student loan repayments. A recent study indicated an employee would commit to working for an employer for at least five years if the employer assisted with student loan payments. Some employers have been providing such a benefit and, until 2020, any student loan payments made by the employer would have been considered taxable income. 

Beginning in 2020 and through 2025, at least for now, employers are permitted to provide tax-free student loan repayment benefits to employees. In order to receive tax-free payments, such a plan must be in writing and must be offered to a non-discriminatory group of employees. In addition, the tax-free benefit must be limited to $5,250 per calendar year. Now may be the time to consider offering student loan repayment benefits to help retain and attract employees.

Automatic enrollment for employee deferrals in 401(k)/403(b) plan

Most employers offer an employer-sponsored retirement plan such as a 401(k) plan or 403(b) plan to their employees. However, the federal government and several state governments are concerned that employees are either not saving enough for retirement and/or do not have access to an employer-sponsored retirement plan. Some states are mandating the establishment of an employer-sponsored retirement plan, or mandatory participation in a state-sponsored multiple employer plan (MEP). Other states are mandating that employers who do not sponsor a 401(k) or 403(b) plan provide automatic employee payroll deductions into a state-sponsored Individual Retirement Account (IRA) type vehicle sponsored by the state. If you do not already sponsor a 401(k) or 403(b) plan you should confirm if your state has any requirements.

For those employers who do sponsor a 401(k) or 403(b) plan, you should consider implementing an automatic enrollment provision if you have not done so already. Automatic enrollment requires a certain percentage of an employee’s wages to be withheld and deposited into the 401(k) or 403(b) plan each pay period, unless the employee elects otherwise. While the current law does not require an employer to use automatic enrollment, there is pending legislation that would require an automatic enrollment provision in any new retirement plan. Even though existing plans would be grandfathered under the pending legislation, it may be worth implementing an automatic enrollment provision in the 401(k) or 403(b) plan to help and encourage employees to save for retirement. 

If you have questions about any of these or other employee benefit topics, please contact our Employee Benefits Audit team. We're here to help.

Article
Employee benefit plan updates: The Employee Retention Credit and student loan repayment programs

Read this if you want to understand the new lease accounting standard.

What is ASC 842?

ASC 842, Leases, is the new lease accounting standard issued by the Financial Accounting Standards Board (FASB). This new standard supersedes ASC 840. For entities that have not yet adopted the guidance from ASC 842, it is effective for non-public companies and private not-for-profit entities for reporting periods beginning after December 15, 2021.

ASC 842 (sometimes referred to as Topic 842 or the new lease standard) contains guidance on the accounting and financial reporting for agreements meeting the standard’s definition of a lease. The goal of the new standard is to:

  • Streamline the accounting for leases under US GAAP and better align with International Accounting Standards lease standards 
  • Enhance transparency into liabilities resulting from leasing arrangements (particularly operating lease contracts)
  • Reduce off-balance-sheet activities

What is the definition of a lease under the new standard?

ASC 842 defines a lease as “A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” 

This definition outlines four primary characteristics to consider: 1) an identified asset, 2) the right to control the use of that asset, 3) a period of time, and 4) consideration.

(For a deeper dive into what constitutes a lease, you can download the BerryDunn lease accounting guide here.) 

How will this affect your organization?

  • Lease arrangements have to be classified as finance, operating, or short-term leases. In general accounting for the lease asset and liability is as follows:

    • For finance leases, use the effective interest method to amortize the liability, and amortize the asset on a straight-line basis over the lease term. Note that this has the effect of “front-loading” the expense into the early years of the lease.

    • For operating leases (e.g., equipment and some property leases), the lease asset and liability would be amortized to achieve a straight-line expense impact for each year of the lease term. ASC topic 842 establishes the right-of-use asset model, which shifts from the risk-and-reward approach to a control-based approach. 
  • Lessees will recognize a lease liability of the present value of the future minimum lease payments on the balance sheet and a corresponding right of use asset representing their right to use the leased asset over the lease term. 
  • The present value of the lease payments is required to be measured using the discount rate implicit in the lease if its readily determinable. More likely than not it will not be readily determinable, and you would use a discount rate that equals the lessee’s current borrowing rate (i.e., what it could borrow a comparable amount for, at a comparable term, using a comparable asset as collateral).
  • It will be critical to consider the effect of the new rules on your organization’s debt covenants. All things being equal, debt to equity ratios will increase as a result of adding lease liabilities to the balance sheet. Lenders and borrowers may need to consider whether to change required debt to equity ratios as they negotiate the terms of loan agreements.

Time to implement: What do you need to do next?

The starting place for implementation is ensuring you have a complete listing of all known lease contracts for real estate property, plant, and equipment. However, since leases can be in contracts that you would not expect to have leases, such as service contracts for storage space, long-term supply agreements, and delivery service contracts, you will also need to broaden your review to more than your organization’s current lease expense accounts. 


We recommend reviewing all expense accounts to look for recurring payments, because these often have the potential to have contracts that contain a lease. Once you have a list of recurring payments, review the contracts for these payments to identify leases. If the contract meets the elements of a lease—a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration—your organization has a lease that should be added to your listing.

Additionally, your organization is required to consider the materiality of leases for recognition of ASC 842. There are no explicit requirements (that, of course, would make things too easy!). One approach to developing a capitalization threshold for leases (e.g., the dollar amount that determines the proper financial reporting of the asset) is to use the lesser of the following: 

  • A capitalization threshold for PP&E, including ROU assets (i.e., the threshold takes into account the effect of leased assets determined in accordance with ASC 842) 
  • A recognition threshold for liabilities that considers the effect of lease liabilities determined in accordance with ASC 842

Under this approach, if a right-of-use asset is below the established capitalization threshold, it would immediately be recognized as an expense. 

It's important to keep in mind the overall disclosure objective of 842 "which is to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases". It's up to the organization to determine the level of details and emphasis needed on various disclosure requirements to satisfy the disclosure objective. With that objective in mind, significant judgment will be required to determine the level of disclosures necessary for an entity. However, simply put, the more extensive the organization's leasing activities, the more comprehensive the disclosures are expected to be. 

Don't wait, download our lease implementation organizer (Excel file) to get started today! 

Key takeaways and next steps:

  •  ASC 842 is effective for reporting periods beginning after December 15, 2021
  • Establish policies and procedures for lease accounting, including a materiality threshold for assessing leases
  • Develop a system to capture data related to lease terms, estimated lease payments, and other components of lease agreements that could affect the liability and asset being reported
  • Evaluate if bond covenants or debt limits need to be modified due to implementation of this standard
  • Determine if there are below market leases/gifts-in-kind of leased assets

If you have questions about finance or operating leases, or need help with the new standard, BerryDunn has numerous resources available below and please don’t hesitate to contact the lease accounting team. We’re here to help. 

Lease accounting resources 

Article
ASC 842 lease accounting—get started today before it's too late

Read this if you are a business owner or are interested in business valuation. 

BerryDunn’s business valuation team recently authored a book titled A Field Guide to Business Valuation for Owners and Leaders of Private Companies. It is being published by Business Valuation Resources, the leading provider of valuation textbooks, in September. 

A book’s cover can say a lot about a book, and this one is no exception. The title of this book is A Field Guide to Business Valuation. We have organized the book like a field guide used by bird watchers, and encourage readers to keep it on hand as a reference. It doesn’t necessarily need to be read cover to cover. Jump around. If a question comes up about a particular topic, turn to the section that addresses that matter. Or, if learning all about business valuation sounds appealing, by all means read it cover to cover. You may find more to certain topics than you initially thought. Here are some of our notes about the book.

We wrote this book based on data from the field. It is based on our experiences helping business owners estimate, preserve, and increase business value. We work with people who don’t have a business valuation background. We regularly use simple analogies to help people understand complicated topics. We get used to answering the same questions that come up, and we have had many opportunities to hone our answers. After years of explaining business valuations in conversations and presentations, we wrote this book to provide more people with a greater understanding of how businesses are valued. 

This book is intended for business owners and their advisors who would like to learn more about how to estimate what a business is worth, what factors affect value, and how to make businesses more valuable. After reading this book, the reader should be conversant in business valuations and comfortable with the overall valuation framework. It is not an exhaustive dissertation on business valuation. There are many other (very thick) books that get into the details, picking up where this book leaves off. This book is for people who want an understanding of how businesses are valued but don’t have the time to read heavy textbooks. 

The book is designed for people who want to learn how to perform valuations themselves. While it doesn’t contain all the details necessary to master the craft of business valuation, it is a great introduction to the topic. 

Our focus is on the valuation of privately held businesses, not publicly traded companies. Public companies can be valued based on their stock prices or various intrinsic valuation models. The value of private and public companies is affected by different factors. 

We hope this book answers questions, provides new insights, and is an enjoyable read. Stay tuned for more details about availability and opportunities to learn more about the content. If you are interested in learning more, please contact Seth Webber or Casey Karlsen.

Article
We wrote the book on business valuation—and it's available now

Read this if you are a construction or architecture and engineering firm looking at ESG initiatives at your organization.

Environmental, Social, and Governance (ESG) is an ever-growing topic that may have a significant impact on the future growth and sustainability of your company. Beyond the awareness of ESG, the key question is, “Why should I care?” While there are a multitude of answers to this question, there is one answer that can propel your business forward to outpace your competitors and create value. 

ESG initiatives for construction, engineering, and architectural firms can be broken down into four separate value creation opportunities: growth through competitive bidding, cost-reduction, investment optimization, and cultural enhancement. Here we look at the benefits of each that your company can leverage to improve your competitive advantage.

Growth through competitive bidding

According to recent data, the construction industry accounts for nearly half of total CO2 annual global emissions, including 27% from building operations, 10% in building materials and construction, and 10% in other construction activities. Combined with the US goal of net-zero emissions by 2050 set by the White House, there is a heightened focus on environmentally sustainable construction. As reduced emissions goals evolve at the state and local government level, there are increased opportunities for ESG-focused companies to expand into new geographic markets and continue to grow in existing ones. Particularly for government-driven projects, there has been increased screening of contractors for their prior and current sustainability performance. By improving your ESG profile, you may be able to get more government projects moving forward. 

Cost-reduction

When it comes to cost-reduction, ESG initiatives are often thought of in a negative light. Through a strong ESG program, there are a multitude of cost-saving opportunities. Operational costs can be reduced by implementing ESG initiatives that promote reduced water and energy consumption. Some key cost-saving opportunities for contractors, architects, and engineers may lie in the Social (behavior around people, political and social issues) and Governance (corporate behavior, including compensation and profits) pillars of ESG. Cultural enhancement is linked to reduced employee turnover, which can increase productivity and reduce labor and overhead costs. A strong ESG approach also lowers the risk of regulatory and legal intervention, which can reduce costs by eliminating project delays and mitigate risk of liability. 

Investment optimization

Shifting focus to employ an ESG-conscious approach could help minimize exposure to long-term investment risk due to environmental and sustainability concerns. While there are certainly upfront costs when implementing an ESG strategy, failure to act or explore now may eventually result in even greater expense in the future. Regulatory frameworks are in the process of being created that will ban or limit the use of certain building products. The cost of removing banned products and installing eco-friendly ones in the future will likely exceed the cost of using eco-friendly products today. ESG is a forward-thinking process that requires some up-front cost and effort that most believe will pay in dividends in the future. 

Cultural enhancement

ESG-conscious companies can attract and retain talent, improve employee morale and motivation, improve productivity, and lower costs. ESG components in the workforce can range from health and safety precautions on job sites to well-being initiatives and staff learning and development programs. Studies show that the Millennial and Gen Z generations place a larger importance on a company’s ESG program than former generations. These two generations will overwhelmingly account for the majority of the workforce in the next five to 10 years. ESG programs that place a focus on employee well-being are beneficial for the employee, employer, and in turn the environment. 

Implementing a strong ESG approach doesn’t happen all at once. By making small inroads in some of the areas mentioned above, you can better position your company for success in the future and take advantage of the many opportunities ESG may provide. 

If you have questions about ESG or have a question about your specific situation, please contact our construction team. We’re here to help you find and navigate new opportunities.

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Value creation and ESG: Building a better future—and business