Industry Committee Corner

First Family Office Conference a Sold-Out Success
Speakers Address Philanthropy, Office Structure and Issues Central to the Family Office
By Gabe Kahn

A sold-out crowd attending in person at the FAE’s first-ever Family Office Conference illustrated just how important this area of CPA practice is for the profession.

A total of 150 attendees packed the offices of Bernstein Global Wealth Management for the half-day conference, with another 20 on a waiting list for the event. About 25 more participated via webcast.

“We closed out registration a week and a half early,” said Mark B. Rubin, chair of the Family Office Committee and a member of the Industry Oversight Committee. “I got a half a dozen phone calls the day before from friends asking if I could make an exception.”

The ever-growing reach and relevancy of family offices was a major impetus for the formation of the NYSSCPA’s Family Office Committee and this new conference, Rubin said.

“The topic of family offices at this point has reached a tipping point and has become a multidisciplinary topic that is much broader than just the CPA practitioner,” Rubin said. “It also includes investment advisers, trust and estate attorneys … and multifamily offices, as well as single-family office executives. The interest in attending this conference was driven by this diversity.”

Susan R. Schoenfeld, a member of the Family Office Committee and the Estate Planning Committee, who also helped plan the conference, said she was “thrilled” to see it so well received. “We felt that this is a growing area of practice for Society members and others in the community,” she said, “and we wanted to provide a forum to enhance that communication and networking and information sharing.”

Structuring a Family Office

Family businesses were once informal businesses where it was assumed that a child would eventually take over the operations, said Kathryn McCarthy, a director of the Rockefeller Trust Company, but times have changed. Families have become increasingly concerned about the long-term sustainability of their offices, she said, causing them to adjust their thinking.

“There’s really a focus on structure and maintenance. Why? The current environment is really the cumulative effect of families of the crash and postcrash,” she said.

Family offices, she said, are now merging with other family offices, replacing family members with outside leaders, launching new investment vehicles and growing assets under management in an effort to be more sustainable. However, McCarthy said that the most important thing a family office must do for the sake of sustainability and structuring is to create a strategic plan. She tells her clients to consider where they’d like to be in 10 years and then look backward and figure out what they would need to do to get there.

“Families that adopt some form of strategic planning can structure their office more tax-efficiently; they can set up better governance. They just know more,” she said. “You can’t put the family office on autopilot like many families believe they can.”

Putting Family Up Front

Because every family has its own politics, running a family foundation has the potential to be volatile. “Do you let the son-in-law be on the board? Do you let the son or daughter-in-law use the foundation?” asked Charles W. Collier, the senior philanthropic adviser at Harvard University. “This is a really difficult conversation.”

Collier suggested implementing a junior board to allow younger family members -- usually between the ages of 18 and 21 -- to make their own decisions and develop skills before joining the regular foundation board.

Giving

Creating a philanthropic foundation was another subject covered at the conference, with Henry L. Berman, the acting CEO of the Association of Small Foundations, focusing primarily on donor-advised funds (DAF) and private foundations. A DAF, he said, is essentially a public charity, almost like a community foundation. A private foundation, on the other hand, is set up for individual unique entities, is similar to a trust, has tax-exempt status and must follow certain government regulations.

“Whether your clients choose to establish a private foundation or a donor-advised fund, I suggest that their purpose is really the same: It’s to give money away; it’s to help change the community, whether that’s locally, nationally, globally; and to change the world,” said Berman. “And as somebody said to me, how hard can that really be?”

Tax Planning and IRS Audits

What should a family office do if it is audited by the IRS? One important consideration, said Carl C. Fiore, a director with WTAS LLC, a tax consulting firm in New York, is ensuring that the family office’s expenses are solely business -- not personal.

Another is to establish the organization’s structure with a written business plan and regular meetings. Fiore said that these elements will help prove that a family business is just that -- a business -- and not simply a way to manage money.

NYSSCPA member Patricia Rondina said she was impressed by this first Family Office Conference’s speakers and diverse material. “I work in a CPA practice and we have a couple of family offices that we’re involved with, so the material for me was relevant, and it was interesting to hear the different perspectives from the various speakers,” she said.

Family Office Committee member Lisa M. Kunz said she has been involved in the family office practice area for about five years, and was excited to find out there would be a conference devoted to it. “I’m glad that the New York State Society has seen this as an important aspect of the accounting world."

Banking Conference Panel Discusses Risk Management
By Gabe Kahn

In the aftermath of the financial crisis, corporations are reexamining how they assess risk in order to avoid the same mistakes that contributed to the recent collapse of a number of large firms and institutions.

This enhanced focus on enterprise risk management (ERM), which represents a significant shift in the way businesses analyze risk, was at the center of a panel discussion at the FAE’s Banking Conference on Nov. 4.

Speakers addressed the benefits of proper management and challenges they’ve encountered. Christopher D. Wolfe, the managing director of the financial institutions group at Fitch Ratings, spoke from the perspective of managing risk; NYSSCPA member Ray Quinlan, a former CEO of North America for Citigroup, discussed how board members deal with ERM; and Dawnella Johnson, a partner at Crowe Horwath LLP, and NYSSCPA member Jason Langan explored its direct impact on CPAs.

Wolfe said that the financial downturn prompted many institutions to return to the basics with regard to ERM. Risk management, he said, is essentially, “Going around and saying: What kind of credit risks do we have? What kind of interest rate risks do we have? What other risks do we have and how do we total that off and put it in some kind of number that we can then share with other people within the organization?”

It’s not only important for organizations to consider this, but also to have a specific individual who deals with ERM. “This provides a little more formality,” Wolfe said. “It provides a central point of contact for senior management, for an outside individual or stakeholders to understand what kind of risk the company is taking on.”

Looking back, it may seem obvious that ignoring the fundamentals of risk was at least partially responsible for the failure of a number of large institutions, but, “quite frankly, many of them did have ERM functions, so it’s not as if the absence of an ERM function was their downfall,” said Wolfe. Rather, he said, it was the way risk was treated that led to the problems. “When limits and risk tolerances got in the way of what they wanted to do, you just overrode the limit. You waived it, you raised it, you did something other than actually adhere to it,” he said.

“If [the ERM] function doesn’t have any teeth, it doesn’t really mean anything,” he said. “And so we’ve seen reporting lines strengthened and changed. We’ve seen more [chief risk officers] and ERM functions reporting to the CEO or having direct lines to the board.” He added that ERM is “no longer really subordinate to the business lines,” which it may have been previously.

The focus of risk ought to be on the overall company strategy, “instead of having a litany of 3,000 individual risks and controls that are focused on very operational issues,” Johnson said. “I know you’re thinking, ‘Man, that seems really obvious.’ That’s because it’s designed to just be very good business and drive better business results, which is one of the reasons I’m such a big fan of it.

“If you’re delivering 500-page epistles every time you talk at the board level about all of these details, you’re going to lose their focus and their energy very quickly,” she added. “In most of the committees that I’m seeing now where I think the standards are a little bit higher, we’re forcing ourselves to condense leading indicators to risk dashboards, things along those lines, which are comprehensible and digestible by the full board, to hone the risk management committee and the audit committee report.”

Until recently, Quinlan said boards weren’t focused on risk and considered the processes too detail-oriented -- something to get out of the way so that they could discuss other things. Often, the process was quite decentralized, what he called the “Captain Nemo approach,” referencing Jules Verne’s Twenty Thousand Leagues Under the Sea.

“Captain Nemo was chosen by Jules Verne in particular because Nemo in Latin means ‘no one,’ ”Quinlan said. “So the Captain Nemo approach says ‘Oh, we’ve got this stuff out and someone’s handling it in all these different committees.’ But it doesn’t come together anywhere.”

In order for ERM to work, it is crucial to have support from the top of the organization on down, Johnson said, and the chief risk officer (CRO) should be a prominent figure.

“I’ve worked with companies where the CRO is someone the leadership team wouldn’t think of having a really big strategic discussion without … because they bring such valuable insights,” she said. “When you’re hiring a CRO or thinking of moving someone into that role, make sure they have the confidence and the ear of the board and senior management.”

At the end of the day, according to Wolfe, the best forecasts for risks are meaningless if no one actually listens to the CRO or adheres to the limits that have been set.

“That, to us, is the real challenge,” he said. “It’s simple. All you have to do is sometimes say no or suggest that things be done differently, and yet we always find it one of the hardest things for an institution to actually do.”

However, companies shouldn’t be fearful of setting these limits, he said.

“Risk limits and tolerances are not something that you write in stone and have to live with forever,” said Wolfe. “They can certainly be changed. But those changes should be done very purposely, thoroughly, with proper consideration and not just done solely to advance business purposes.”

Philip J. Musacchio, a member of the NYSSCPA’s Banking Committee, said he enjoyed the panel’s insights and felt that the speakers stressed vital elements related to ERM.

“Enterprise risk management is something that’s near to my heart, so it’s good to hear different perspectives,” Musacchio said. “I think they communicated the points that, really, the tone has to be set at the top and that communications need to take place with the board and they have to be clear on their responsibilities.”

Duty-Free Treatment of Holiday Merchandise to Be Restored
By Alan Goggins
Apparel and Textile Committee Member

For the past two decades, U.S. Customs has disallowed duty-free treatment of imported utilitarian holiday merchandise, which can include such items as tableware, apparel, towels and a number of other functional goods. Customs has insisted that such merchandise be treated the same as comparable nonholiday merchandise, with duty rates as high as 30 percent or more. Purely decorative holiday merchandise such as Christmas tree ornaments or Halloween decorations, on the other hand, have been continually imported duty-free as festive or holiday articles.

The decision in the 2007 case of Michael Simon Design vs. United States provided for duty refunds on holiday-themed apparel, classifying and treating such apparel as duty-free festive articles. This case applied to shipments imported prior to 2007. But that same year, customs and the United States International Trade Commission (USITC) amended the U.S. tariff statute Harmonized Tariff Schedule of the United States (HTSUS) to narrow the scope of the festive articles tariff provision to again disallow the duty-free treatment of almost all utilitarian holiday merchandise. Customs and the USITC agreed that the duty-free treatment of holiday apparel and other holiday merchandise should be restored and, recently, the USITC, at the behest of customs, initiated the process of changing the festive articles tariff provisions.

The new proposal was published in the Federal Register on Sept. 20 as “Certain Festive Articles: Recommendations for Modifying the Harmonized Tariff Schedule of the United States.”

Most importantly, they have requested that the corrections be made retroactive to 2007.

What Merchandise Is Covered

Under the new proposal, duty-free festive articles treatment would be opened up for many types of merchandise incorporating holiday symbols or motifs such that the use of the articles is generally limited to around that holiday. For example, a Santa Claus motif textile floor mat would have an expected use limited to the Christmas holiday and would qualify for duty refunds on current shipments and, eventually, duty-free importation on future shipments. An article decorated with a heart, however, would probably not qualify, as hearts are not limited to only Valentine’s Day use. The new proposed festive articles tariff provision covers—

• tableware, kitchenware or toilet articles classified in the tariff statute under
• chapter 39 (plastics),
• chapter 69 (ceramics) and
• chapter 70 (glassware).
• other items, which include
• carpets and floor coverings in chapter 57;
• apparel in chapters 61 and 62 (covers almost all apparel); and
• textile articles in chapter 63 (towels, blankets, placemats, etc.).

Timing and Recommendation

The USITC accepted written comments on the proposal through Oct. 22, and expects to issue its recommendation to President Barack Obama on Nov. 29. If all goes smoothly, an effective date should occur sometime in the first quarter of 2011.

While qualifying holiday merchandise imported after the effective date of these amendments in 2011 would be given dutyfree treatment upon importation, an opportunity exists now to claim duty refunds on such holiday merchandise imported in 2009 and 2010 that was not previously allowed duty-free treatment.

Only importations that are the subject of timely protests would be eligible for duty refunds, as customs generally has no authority to issue duty refunds other than through protests. Protests are subject to strict time limitations as to when they can be filed, and no timely protest simply means no duty refund. If importers act quickly, however, they can file timely protests on most of the 2009 and all of the 2010 holiday merchandise importations.

Approval of these claims would occur after the passage of the proposed 2011 amendments to the tariff statute.

The big holidays for this merchandise are Halloween and Christmas, and the merchandise for those holidays is generally imported from June to October.

Alan Goggins, of Barnes Richardson &Colburn, is a member of the NYSSCPA Apparel and Textile Committee. He is an attorney with a customs and international trade practice. He was the plaintiffs’ attorney in the 2007 case of Michael Simon Design v. United States. He can be reached at agoggins@barnesrichardson.com.
 

Banking Committee Examines FASB’s Fair Value Measurement Proposal
By Jorina Fontelera

There are still key differences between the Financial Accounting Standards Board’s (FASB) and the International Accounting Standards Board’s (IASB) proposals for measuring financial instruments— especially regarding when to use fair value or amortized cost to calculate an instrument’s value—despite the two boards’ efforts to release exposure drafts that mirror each other and result in a single standard.

This “inability to reconcile puts convergence at risk,” said Dina M. Maher, a member of the NYSSCPA’s Banking Committee, who provided an overview of the proposals for members of the committee during its meeting on Aug. 10.

Saying that the preferred proposal is “influenced by which side of the pond you’re on,” Maher focused primarily on the FASB proposal in her presentation, while pointing to the differences within the IASB’s draft.

“I don’t have all the answers and there’s a lot we still don’t know,” Maher said, “but I wanted to give you a taste of the FASB/IASB changes and exposure drafts to watch out for.”

Maher said that while people talk about the two proposals as being very different, “it’s really the overlay of fair value” that is affecting their convergence. “This’ll be [a] big test of convergence in general,” she said.

The Proposed Approaches

Currently, there are still differences between the FASB’s and the IASB’s proposed standards for measuring financial instruments, which are laid out in the FASB’s table, “Comparison of the FASB’s and the IASB’s Proposed Models for Financial Instruments.” The FASB, Maher said, created a “three bucket” measurement system for financial instruments: fair value through net income (FV-NI), fair value through other comprehensive income (FV-OCI), and amortized cost—the initial cost of a financial instrument plus interest gained over its life. The IASB also proposed using the same measurement categories, but planned to apply the measurements in a slightly different manner.

The first category—the default category—would measure all financial instruments, including loans, at fair value, according to the FASB proposal, with changes in that value recognized in net income on the balance sheet, Maher said. The IASB is also proposing to have financial assets or liabilities measured at fair value, but only if it would eliminate or reduce an accounting mismatch and if the liability is part of a group of financial instruments evaluated on a fair value basis and is a hybrid of financial instruments.

The second category would be for debt instruments, including loans, held by a business for collection or payment of contractual cash flows, according to the FASB. These would be measured at fair value through other comprehensive income (FV-OCI).

According to the FASB’s proposal, to qualify for measurement under the FV-OCI classification criteria, the financial instrument must be—

•  a debt instrument, held or issued, that has an amount transferred to the debtor/issuer at inception that would be returned to the creditor/investor at maturity or settlement, which is the principal amount adjusted by any original discount or premium;
•  a debt instrument that has contractual cash flows to be paid to the investor periodically or at the end of the instrument’s term, which cannot be prepaid or settled; 
• an instrument used to collect or pay contractual cash flows; or
   
•  an instrument that is not a hybrid, that has characteristics of multiple types of instruments, such as a convertible bond.

Additionally, these debt instruments would no longer be subject to tainting rules laid out in the IASB’s International Accounting Standard (IAS) 39, Financial Instruments: Recognition and Measurement, limiting the further use of amortized cost after the disposal of financial instruments measured at amortized cost.

The FASB proposed removing the tainting rule because it wanted a principlesbased standard, Maher said. She also added that “once you classify under FV-OCI, you can’t change it to fair value [through] net income.”

The IASB’s proposal only has one criterion for measuring financial instruments at FV-OCI, and that is reserved for investments in equity instruments that are not held for trading.

The third category—measurement through amortized cost—would be reserved for financial liabilities if “measurement at fair value would create an accounting mismatch,” Maher said.

According to Maher, there would be four permitted instances where an instrument would be measured at amortized cost in the FASB proposal. The first instance would be for financial liabilities that are linked to an asset not measured at fair value or are linked to a consolidated entity or operating segment with less than 50 percent of assets not measured at fair value. The second instance is for short-term receivables and payables, because in theory, their cost would approximate fair market value, Maher noted. The third case would be for investments that can only be redeemed for a specified amount. Liabilities with maturities so short that fair value would again be approximated would also be measured at amortized cost.

Both amortized cost and FV-OCI would be presented on the balance sheet because the FASB wants investors to read these values and not have them buried in footnotes.

These should also be more “robustly audited and calculated,” she said. Unlike the FASB, the IASB proposal allows more to be measured through amortized cost. According to the IASB proposal, financial assets—including hybrids—must be measured at amortized cost if they are held for the collection of contractual cash flows and the contractual cash flows are solely payments of principal and interest. Liabilities must be measured at amortized cost if they are not held for trading, the FASB/IASB proposal comparison document said.

The IASB proposed these changes to IAS 39, to create a standard that is “principles-based and less complex,” the IASB said.

Alignment Efforts

Maher also touched on calculating impairment of financial instruments. The FASB proposed that impairment—the potential to acquire more losses than expected—be calculated with a single, credit-only impairment model, where the estimate for cash flows that will not be collected will be based on past events and current positions, rather than on an expected loss model where future conditions need to be forecasted and taken into consideration, according to Maher. Additionally, the instruments can be evaluated on an individual or pool basis.

The IASB, on the other hand, proposed that initial expected credit losses be allocated over the life of the instrument. Basically, it is asking people to build in allowances for loans to go bad from the get-go, she said, adding that “you don’t know which loans will go bad, but you have to build an allowance for the number of loans you think will go bad.” Critics say this would be pretty close to impossible to do, Maher noted.

Source: NYSSCPA Staff

In doing so, “you have less subjectivity and can track items better,” Mannhaupt said. “It allows that contractor to measure his actual costs to the estimate costs at the end of the project and evaluate the success of the project.”

Contractors face many challenges when it comes to writing up bids and contracts, which may also cause headaches for the CPAs who use the contracts to create financial statements for their contractor clients. These concerns were the focus of a presentation Mannhaupt gave during the Construction Contractors Accounting, Consulting and Taxation Conference held today at the offices of the NYSSCPA.

Job Costs

Noting that “the financial statements of contractors mainly have to do with costs,” Mannhaupt said it is essential that CPAs “have an understanding of both direct and indirect costs.”

Direct costs are costs that can be correlated to individual jobs such as labor, materials, subcontracts and equipment. “Typically, this is not an issue with accountants and contractors,” Mannhaupt noted, because “if you didn’t have the contract, you wouldn’t have the costs.”

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