Yamot Articles Directory

Financial accounting strives to answer two basic questions: how did the business do last year, and what did the business own and owe at the end of the year? The answers to these questions are summarized in two basic statements, the income statement and the balance sheet.

If you have even a passing knowledge of business and economics, answering these questions might not seem that difficult. In fact, determining a firm’s economic performance and condition often is very difficult. Unfortunately, financial statements rarely are able to give completely definitive and precise answers to what seem to be simple economic questions. Why would this be so?

Accounting’s measurement problems derive primarily from three factors. First, it is difficult to pin down exact criteria for measuring economic performance and economic condition. Second, accounting uses money as its fundamental measurement unit, and money’s unit value is not stable over time. Third, accounting rule makers have to allow for the fact that business managers often are motivated to distort economic reality rather than reflect it accurately.

What is Economic Performance and Economic Condition?

In terms of economic performance, our simplest criterion for doing well surely involves looking at cash flows. A business does well if it brings in more cash than it spends and vice versa. But for all but the very simplest of businesses such a measurement approach can be very problematic. Negative cash flow is not necessarily equivalent to poor economic performance and vice versa. Because of these problems, accountants have had to develop a more abstract concept of economic profitability, which creates its own problems.

Accounting encounters even more difficulty in trying to pin down a firm’s economic condition. To determine economic condition we want to find out about a firm’s assets and their values. But there is more than one standard of value. Should accountants use current market values for assets owned or the original cost incurred to acquire them? Rarely are these values the same and there are advantages and disadvantages to both standards.

There also is legitimate controversy about what should be counted as assets on the balance sheet. For example, should the value of personnel or intangible assets, such as patents, trademarks and goodwill, be measured and included? If so, how do we measure their value?

Money: Accounting’s Unstable Measurement Unit

In accounting the unit of measurement is money. Money is a medium of exchange that has value only to the extent that it can be traded for goods and services. But, money is not a stable unit of measurement, because its exchange value varies with time. What one dollar buys today in goods and services is almost never the same as what that same dollar purchased last year or will purchase two years from now.

The practical ramifications of this instability of money as a measuring unit are pervasive. If a company had net income last year of $100,000, was its economic performance the same as it was five years ago when its income statement also showed a $100,000 net income? Decidedly not, if the purchasing power of the dollar changed significantly in the intervening five years.

Questions about economic condition are also affected by the instability of money as a measurement unit. For example, consider two companies each with $800,000 of assets and $500,000 of liabilities. In the case of one company, all its debt must be repaid within one year, while the other company’s debt does not have to be repaid for ten years. Are the economic conditions of the companies the same? Again, decidedly not, because the purchasing power of the dollar will change over the next ten years.

Accounting rule makers have struggled greatly with the questions of how and when these changes in the value of money should be reflected.

Measurement Error: Management’s Motivation for Mendacity

Measurement error is unavoidable. But it would be nice if we could assume that almost everybody involved in the accounting measurement process was highly motivated to avoid errors. Sadly, this is not the case, because business managers often wish to avoid accurate measurements if such accuracy would lead to significant damage to their career and finances. Facing such ruin, managers will be strongly tempted to avoid fair and accurate measurements. Managers will seek to “cook the books”.

There are two important ramifications for accounting stemming from this motivational bias. First, in order for financial reports to have any credibility at all, they have to be verified by independent auditors. This is an expensive and often imperfect process. Second, in formulating accounting rules, the rule makers have to carefully consider how any proposed measurement procedures might be subverted by managers intent on providing a skewed view of economic performance or condition. The practical consequence is that the accounting rules that might be most logical and simple are often not adopted because these rules also tend to be the easiest ones for managers to distort.

Michael Sack Elmaleh is a Certified Public Accountant and Certified Valuation Analyst. His book, “Financial Accounting: A Mercifully Brief Introduction”, has received wide critical acclaim. He has nearly 30 years of accounting and 10 years of teaching experience.His web site is understand-accounting.net

These days accounting software forms the backbone of most businesses and the right package can improve your decision-making and responsiveness, which in turn leads to increased productivity and profitability. Business staff need to be able to access the right financial information whenever it is needed. Any business manager needs a completely accurate picture of their business operations at any time, not just at the end of the month.

Accounting software has come a long way in the last few years. It is no longer just about invoices, payments and payroll. It can link together every single aspect of a business from customer relationship management to despatch and delivery. Your accounting package needs to integrate with your existing systems allowing staff to extract and input data easily via applications that they use every day such as Microsoft Office. This avoids the re-keying of data which is time consuming and can lead to errors.

Business managers need financial information on a daily basis in order to make the right decisions and respond effectively to issues as they arise. If they have to wait for weekly or even monthly reports, they are working blind for most of the time. Your accounting package should allow you to access data in real time, ie: All data is updated simultaneously with each transaction and not in batches or at pre-set intervals.

You need to be able to produce management accounts and other reports for meetings, presentations and mailings, often with minimum notice. A good accounting package will allow you to do this easily either using ready-made templates or specially customised reports.

Sales orders and timesheets can be completed electronically by individuals across the organisation, even by those working remotely, and sent straight into your accounting system updating the records immediately. This removes the need for manual records, reduces admin and ensures more accurate data.

Some packages will also allow you to request an alert on your PC, for example when an order comes in or a client goes on stop. This helps managers to keep in touch with what is going on in the business minute by minute and allows them to address potential problems or opportunities as they arise.

Your accounting software should be able to provide you and your managers with an instant overview of your profitability, sales pipeline, debtors etc as well as the detail of each individual transaction. It should allow you to track each order from start to finish. This can all be done in a matter of minutes, allowing managers to spend more time improving customer service and developing your business.

As organisations become more and more reliant on their IT systems, security of data becomes increasingly important. In the event of a power or hardware failure valuable data can be lost so it is important to ensure that your system is completely secure and saves each transaction as it is entered.

Flexible and remote working is becoming more common and these people also need to have access to your accounting system so they can view the relevant information and input data as appropriate. They may be out of the office for days or weeks at a time but need to keep in touch with what is going on and to update customer records.

As your business grows your system will need to evolve to cater for more users - possibly at different sites, new products and services, new channels and markets and inevitably new internal processes. If your accounting package is not flexible or powerful enough to grow with your business, you may find you spend more and more time and money trying to fix problems, and ultimately your system will prevent you from moving forward.

On the other hand, if you invest wisely in the right accounting package, it will not only support your growth, it will help you to improve the way you manage your business and ultimately, your profitability!

Shaun Parker has had first hand experience in the changes to both accounting, IT support and payroll services. His need for IT Support London is outsourced and has enabled more time to be spent at the golf course or at home.

For the tech-savvy individual, shopping on the net has never been more convenient with the many available choices you have as well online. Before placing and finalizing your order, there are several important concerns one has to bear in mind whether you are a savoir-faire online shopper or you are just concerned about the security of your provided information.

Cyber thieves are scattered all over the world wide web. It is important that your online store has a secure server where your information will be stored and any information you will be providing online will be encrypted. Check also if unauthorized charges are covered by the online store although many of the major banks provide support and assistance on such matters. This is very important especially when you use your debit cards or credit cards in making the online purchases.

Most sites provide numerous payment options. Some sites allow you to fax your order and credit card information. Paying by check online is also allowed. The order could even be placed in advanced with the payment billed later. Of course, the item won’t be shipped until payment has been made or the check has cleared. Add a few days for delay in expecting your ordered item if your payment is through mail.

Shipping options being offered may include next day delivery or others depending on how much shipping costs you are willing to pay for. Some sites offer free ground shipping within a specified area or location for all orders or for orders reaching a certain minimum amount. Check the available options to ensure that your orders will be shipped on time especially if it is for the holidays or an occasion like a birthday or anniversary for example.

A major concern for most people would be the online store’s return policy. You cannot expect to always give the right size, fit, etc. when buying presents for someone else. Quite often even if we do get the size right for instance, it isn’t a guarantee that the fit will look great. We would want to be able to purchase from an online store that allows returns or exchanges.

Most online stores provide the extra service of gift wrapping the ordered present sometimes for a charge or for free. Gift cards with a personal message are as well included. The gift wrapping fee is nominal compared to the time savings obtained in having the gift wrapped and shipped directly to the recipient.

James Brown writes about Exposures online coupons, Smugmug deals and Wolf Camera deals

This article examines the impact on taxpayers and appraisers as well as their advisors of the new Federal provisions of the Pension Protection Act. For appraisers performing valuations for federal tax purposes in accordance with the Pension Protection Act (PPA), signed into law in August 2006, stipulates new penalties and stiff sanctions if the appraisers or appraisals fail to meet the new qualifications.

The Backdrop

The Congress and IRS, to safeguard the U.S. tax system and force taxpayers to straighten up, have introduced new rules and restrictions that impact lawyers and accountants as well as taxpayers. The Pension Protection Act (PPA) of 2006 establishes severe penalties for unethical conduct on the part of accountants involved in federal tax information consultancy to private firms.

Previously, the government’s targets for tax abuse were various corporate transactions. But now it has trained its guns on the venerable charitable contribution deduction as well. The act attempts to prevent overvaluing the property given to charity to take advantage of the fair market value deduction. According to Section 170(f)(16)(B), Congress has invited the IRS to stop the deduction completely. In the middle of the gun battle are the appraisers who opine for the taxpayers about the values of property that they give to charity.

Qualified appraisers
PPA also requires that appraisals need to be prepared by qualified appraisers.1 A qualified appraiser is defined in the Act to mean a person who has earned an appraisal designation from a recognized professional organization or has met minimum education and experience requirements established by the Treasury Secretary through regulations. An appraiser will not be treated as a qualified appraiser unless the appraiser demonstrates verifiable education and experience for valuing the type of property subject to the appraisal. Also, the appraiser must not have been prohibited from practicing before the IRS at any time during a three-year period prior to the date of the appraisal.

To sum it up, it is now required that an appraiser valuing property for charitable deduction must be trained and experienced and a vague representation by the appraiser will no longer suffice.

Appraisal Impact on Charitable Contributions
PPA has led to an increase in mandatory requirements for appraisals and appraisers to meet Internal Revenue Code Section 170, which covers charitable requirements.

It is now required that all claimed deductions in excess of $5,000 must be accompanied by a “qualified appraisal.” The regulations have duly defined the terms “qualified appraisal” and “qualified appraiser.”

All appraisals to qualify must fully comply with Uniform Standards of Professional Appraisal Practice (USPAP). Those that do not fully comply but are “consistent with the substance and principles of USPAP also satisfy this requirement.

Qualified Appraiser:

According to the Act for a person to be a “qualified appraiser” must meet 5 requirements as laid down in the code. According to these requirements, an appraiser must:

1. Have earned an appraisal designation from a recognized professional appraiser organization
2. Demonstrate “verifiable education and experience” in valuing the type of property subject to the appraisal
3. Regularly performs appraisals for compensation
4. Not appear on the IRS’s disqualification list at anytime during the three years prior to the date of appraisal
5. Meet other requirements [to be] prescribed by Secretary

However there is an exception available to taxpayers when the appraiser fails to meet the Act’s rigorous requirements. The denial of the deduction is inapplicable “if it is shown that the failure to meet such requirements is due to reasonable cause and not to willful neglect.”

Further, Notice 2006-96 states that the designation must be “awarded on the basis of demonstrated competency in valuing the type of property for which the appraisal is performed.” Additionally, the Notice notes that alternative education and experience requirements are met if the appraiser has done each of the following:

1. Successfully completed college or professional level course work that is relevant to the property being valued.
2. Gained at least two years experience in the trade or business of buying, selling or valuing the type of property being valued.
3. Fully described his or her relevant education and experience in the appraisal.

Prevention is better than cure. By adhering to norms and being organized and cautious about the whole process would ensure that you have nothing to fear. Educating yourself about the new law and its implications will further minimize your chances of getting in the way of PPA radar and getting penalized heavily.

Mel Abraham CPA, CVA, ABV, ASA, CSP - author & Adjunct Professor (USD Law School. Further, for access to an audio presentation on IRS penalties and the Pension Protection Act visit http://www.valuationeducation.com/penalties.html. He can be reached at mel@melabraham.com.

This article examines the impact on taxpayers and appraisers as well as their advisors of the new Federal provisions of the Pension Protection Act. For appraisers performing valuations for federal tax purposes in accordance with the Pension Protection Act (PPA), signed into law in August 2006, stipulates new penalties and stiff sanctions if the appraisers or appraisals fail to meet the new qualifications.

New Appraiser Penalty

The new regulations have started to have a unsettling effect on the appraisers, primarily because it raises many questions, including what kind of tax (gift and estate tax, income tax, or both) is affected, and who may be hit by penalties.

Further, PPA added the new Section 6695A to the Internal Revenue Code. Section 6695A includes new penalties, which are pertinent to appraisers of property for income and transfer tax purposes.

New penalties are applicable to appraisals provided in connection with returns or claims for refunds filed after August 17, 2006. Penalties are applied when the appraised value of property deviates from the correct value by certain set percentages as follows:

“Substantial Misvaluation” (income tax environment): 150 percent or more off of actual value.
“Gross Misvaluation” (income or transfer tax environment): 200 percent or more off of actual value in an income tax case or 40 percent or less in a transfer tax case.

Appraiser penalty applies for appraisals prepared for returns or submissions filed after the date of enactment.

Amount of Penalty
Rather than the aiding and abetting penalty under section 6701 (generally limited to $1,000), appraisers are now subject to a penalty equal to over $1,000 or 10 percent of the underpayment attributable to the valuation misstatement, up to a maximum of 125 percent of the appraisal preparation fee (gross income) received by the appraiser.

Levying new penalties requires certain criteria to be fulfilled, including:

1. Appraiser must prepare an appraisal only in connection with a return or a claim for a refund.
2. Appraiser needs to know that the appraisal will be used for the above mentioned purpose.
3. Appraisal must result in a substantial valuation misstatement or gross valuation misstatement.

Misvaluation thresholds have been lowered, and also apply to estate and gift tax appraisals.

A substantial valuation misstatement arises if the value is 150 percent of the correct value. For example, if an income tax charitable deduction of $90,000 is claimed by a tax payee, based on an appraisal of a painting that the payee donates to a museum, and the correct value of the painting is later determined to be only $30,000, penalties would be enacted upon the appraiser section 6695A. In the case of estate or gift tax, a substantial misstatement occurs if the value exceeds the correct value by 65 percent or more. For example, if an appraiser applies a 45 percent discount for a going business with an underlying value of $100,000 for a value of $55,000. If the IRS and court determine that the discount should have only been 15 percent, the correct value would be $85,000. The appraised value is only 64.7 percent (i.e., less than 65 percent) of the “correct” value. As a result, a 20 percent substantial-understatement penalty would be levied on the appraiser’s fee.

A gross valuation misstatement occurs if the value exceeds the correct value by 200 percent or more. In the case of gift or estate tax, a gross valuation misstatement occurs if the value used is 40 percent or more of the correct value.

As penalties under section 6695A are far more severe than prior to PPA, appraisers may be more conservative and might be forced to choose to restructure or raise their fees; although as described above, the more gross income an appraiser derives from an appraisal, the larger the potential penalty. For example, an appraiser prepares an appraisal which he knows will be used to support an income tax deduction for a charitable contribution of the subject property. He charges $6,000 as the appraisal preparation fee. He values the property at $1 million, resulting in an income tax benefit from the deduction of $300,000. The correct value is $600,000, resulting in an income tax benefit from the deduction of $180,000. The appraiser is subject to penalty in this case as the claimed value of $1 million is more than 150 percent of the correct value of $600,000 (i.e., $900,000). According to PPA guidelines, appraiser’s penalty in this case is $7,500 (125 percent of the $6,000 fee), because this is less than 10 percent of the tax underpayment (10 percent of 120,000, or $12,000).

The new penalties imposed under section 6695A create a non-uniform field for appraisers engaged by taxpayers and appraisers engaged by the IRS. Taxpayer appraisers are likely to be under the scanner of PPA and face penalties if their appraisals are later rejected. On the other hand, IRS appraisers face no similar penalties no matter how far their appraisals are from the values finally determined for tax purposes.

The penalty will not apply if the appraiser establishes to the satisfaction of the IRS that the value established in the appraisal was more likely than not the proper value. However, given the magnitude of the trigger point percentages, it would be unlikely to prove a “more likely than not” standard when the magnitude of difference is 40 percent or 200 percent.

Prevention is better than cure. By adhering to norms and being organized and cautious about the whole process would ensure that you have nothing to fear. Educating yourself about the new law and its implications will further minimize your chances of getting in the way of PPA radar and getting penalized heavily.

Mel Abraham CPA, CVA, ABV, ASA, CSP - author & Adjunct Professor (USD Law School. Further, for access to an audio presentation on IRS penalties and the PPA visit http://www.valuationeducation.com/penalties.html. He can be reached at mel@melabraham.com.

This article examines the impact on taxpayers and appraisers as well as their advisors of the new Federal provisions of the Pension Protection Act. For appraisers performing valuations for federal tax purposes in accordance with the Pension Protection Act (PPA), signed into law in August 2006, stipulates new penalties and stiff sanctions if the appraisers or appraisals fail to meet the new qualifications.

The Implications for Appraisers

Appraisers are now required to operate under quite a few important professional accountabilities. In varying federal tax matters, highly inaccurate appraisals would be subject to substantial monetary penalties, in some cases, forfeiting of 125 percent of the appraiser’s fee. Appraisers need to be aware of the declarations and announcements of the IRS disciplinary office, which has significantly enhanced standards of appraiser conduct, and to bar from appearing before the IRS those appraisers who fail to adhere to the set standards.

The investigative process can result in an appraiser being placed on the disqualification list. As such they can not reapply to the Office of Professional Responsibility for recertification to practice for five years. However, even if they are granted the authority to practice in five years, they are still unable to submit large appraisals to the IRS for another three years due to the qualified appraiser requirement of not being on the disqualified list for the three years prior to the appraisal being performed.

I believe that the appraisal industry, tax advisors and taxpayers should expect the regulatory regime over valuation work to continue to expand in the near future.

The Implication for Taxpayers
The new regulations have outcomes not only for the appraisers but for the taxpayers and their advisers as well those who hire appraisers in connection with planning transactions and filing returns.

The taxpayers and their advisors now need to put in extra effort to select an appraiser who is knowledgeable and experienced enough to steer clear of any violation of Section 6695A or Section 6701 or any other ethical norm. This is necessary because once an appraiser is disqualified all appraisals previously prepared by the appraiser (whether they gave rise to the disqualification or not) become disqualified in the eyes of the IRS. In other words, the appraiser’s work will not be accepted by the IRS as a result of the disqualification. Consequently, it becomes important for taxpayer to select an appraiser based on the quality of work performed, the background and experience of the appraiser so they do not run into problems at a later date. The cliche “you get what you pay for” seems to come to mind when I read through this provision.

Considerations for Survival

It is clear that appraisers need to be extra cautious and avoid all temptation to fall into the net of penalties cast by the PPA. In the light of this new law it is necessary to collect and organize all case information strictly based on facts. Appraisers must focus on arriving at their conclusions via a reasonable, objective path in accordance with the valuation standards. Other factors to consider and integrate into the valuation process include the following:

1. Don’t be an advocate for the client’s position.
2. Don’t value an entity or asset that is outside your area of expertise or authority.
3. Disclose all known, relevant facts in your report
4. Obtain a representation letter from your client on key issues/assumptions.
5. If you feel pressure or are being influenced to arrive at a preconceived value or result, do not take the engagement, or remove yourself from it.
6. Use an appropriate, extensive information gathering process.

One way to move a long way down the road of avoiding be captured in the net of penalties cast by PPA is to have an organized manner in which to collect information, data and facts surrounding the case. By using a detailed process you will gain the ability to create a fact specific and fact supported conclusion based specifically on the information related to the client and case at hand.

We use a secure, automated web-based interview questionnaire. This tool has an initial base of 105 questions in multiple categories. All questions are editable and additional questions may be added as needed. We can modify the questionnaire so it is specific to a client, to allow for unique questionnaires for each client.

We have found that the use of a questionnaire process such as this provides all of the initial information prior to the site tour and management interview to allow for a highly focused and more productive site tour and management interview process.

No matter what interview or questionnaire tools you decide to use by considering the following factors (which are included in the automated web-based interview questionnaire) you will be in a much better position to support your conclusions and in developing an appropriate value based on the specific facts in a case.

1. Basic information such as valuation date, purpose, intended use, valuation date and standard of value as well as a list of data requested for the valuation.
2. Entity information as to capital and legal structure such as, C-Corporation, S-Corporation, Partnership, Proprietorship, LLC, LLP, FLP.
3. Company history including,(a) product lines/services, (b) customers, (c) locations, (d) marketing activities, (e) distribution methods, (f) employees, (g) acquisitions, and (h) ownership.

Other categories include questions related to:

1. Prior transactions,
2. Products or services,
3. Customers,
4. Competition,
5. Suppliers,
6. Operations,
7. Intangibles,
8. Sales,
9. Marketing,
10. Management,
11. Industry,
12. Economy,
13. Financial information
14. Related party information
15. Company expectations and
16. Litigation & claims.

By focusing your data collection efforts in a detailed organized fashion and constructing your conclusions in a reasonable, objective fashion while satisfying the requirements of the established valuation standards, you will find that you will substantially reduce your exposure to the penalty provisions and the teeth of the Pension Protection Act.

Prevention is better than cure. By adhering to norms and being organized and cautious about the whole process would ensure that you have nothing to fear. Educating yourself about the new law and its implications will further minimize your chances of getting in the way of PPA radar and getting penalized heavily.

Mel Abraham CPA, CVA, ABV, ASA, CSP - author & Adjunct Professor (USD Law School. Further, for access to an audio presentation on IRS penalties and the PPA visit http://www.valuationeducation.com/penalties.html. He can be reached at mel@melabraham.com.

With the rising cost of everyday items today creating a family budget plan is becoming more and more important to keep track of where your family’s money is going. Making your money work for you is the ultimate goal of any budget, but you need to be patient if you have never made a budget before.

Most financial problems, both personal and family, are a result of poor budgeting skills or the failure to follow the budget that is made. This is true of people in all income ranges. If you want financial freedom you need to be bale to track your assets and liabilities and your income and expenses.

The fact is that people of all income levels have the same struggles with money. People who earn thousands of dollars per pay check can have the same financial problems as those who earn just a thousand dollars per pay check. The problem isn’t the amount of money one makes at their job; it’s their behavior with their money once they get that paycheck. And the financial behavior of the majority of people is very poor.

A family budget plan is nothing more than a cash flow plan. A plan for your money. We make plans for everything else, from where we are going on vacation to blueprints for houses, but we seldom make a plan for our money. And if there is no plan then your money does not know what it is supposed to do other then get spent on stuff.

A good budget, once you get the hang of it which can take around three months, should take all of your family income and outgoing expenses into consideration. There should be a balance between the income and expense side of the equation. If not then it is time to start finding areas to cut back on. As you work your budget over time it should free up enough money that you can start making allowances for savings and retirement accounts.

The first step of any family budget plan is writing down on a piece of paper your total monthly income and your total monthly expenses. When writing down your expenses be sure to include everything from your biggest payment to the smallest expense. Subtract the expenses from the income and see if anything is left over. If not then you can start looking at the expense column and start cutting out unnecessary items that are costing money that could be better put to use else where.

If you have money left over you need to seriously consider where this money needs to go. If you have debts such as credit cards or car payments it is wise to put some or all of this money towards paying them down. If you have no extra debts start saving and investing. Before long you’ll have a nice little nest egg built that will secure your family’s future.

If you are having trouble keeping within your family budget plan here are four quick tips that can help you meet your goals.

1. Keep a log book or ledger where you can list you income and expenses on a daily or weekly basis. One of the hardest things for most people is keeping track of their daily money habits.

2. When buying groceries make a list before you go and buy all your groceries at one time. Make sure to stick to your list and do not buy things that are not on it.

3. Don’t go to the store if you do not need to buy necessary items. Impulse buying is a budgets worst enemy.

4. If you are tempted to buy something think about it before you make that purchase. For large items over $300 or so take a day to think it over. Chances are you don’t really need whatever it is.

To learn more about building a family budget plan please visit the website Household Budgets by clicking here.