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SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (“LLA’s”). Jeffrey G. Olson, CPA. Babush, Neiman, Kornman & Johnson, LLP www.bnkj.com. Outline. Introduction Assets to be held and used Impairment write-down Assets to be disposed of by sale
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SFAS No. 144Accounting for theImpairment or Disposal ofLong-Lived Assets (“LLA’s”) Jeffrey G. Olson, CPA Babush, Neiman, Kornman & Johnson, LLP www.bnkj.com
Outline • Introduction • Assets to be held and used • Impairment write-down • Assets to be disposed of by sale • Valuation reserves (FV - cost to sell) • Presentation • Assets to be disposed other than by sale • Abandonment • Exchange • Distribution to owners (spin-out)
FAS 144 Supersedes Other GAAP Pronouncements • FAS 121 • But retains its impairment recognition and measurement principals • APB 30 (disposal of a segment of a business) • But retains its discontinued operations presentation requirements • Extends requirements to dispositions “other than by sale”
Effective Date FYE After 12/15/01 • Not applicable to • Goodwill and other non-amortizable intangibles • Financial services intangibles – core deposits, servicing rights, DAC • Equity investments • Deferred taxes • Unproved oil & gas properties • Various other industry specific items
Group Concept • LLA may be part of or in a group with other assets and liabilities • Group is lowest level for which there are identifiable, independent cash flows - LLA itself may not have discrete cash flows • Group becomes the measurement unit for FAS 144 (carrying values, cash flows, fair value) • Does not change GAAP for those other assets and liabilities • They are first measured under GAAP before applying FAS 144 to the group (valuation reserves, LCM write downs, etc.)
Group Concept Terminology • “Asset Group” • LLA’s to be held and used • “Disposal Group” • LLA’s to be disposed (by sale or otherwise) • In a single transaction • Group includes liabilities to be transferred
Outline • Introduction • Assets to be held and used • Impairment write down • Assets to be disposed of by sale • Assets to be disposed other than by sale
LLA’s to be Held and Used • Impairment exists when • An asset’s (or a group’s) carrying value exceeds its fair value • Recognized only if • Carrying value is not recoverable from the sum of thefuture undiscounted cash flows to be derived from the asset (or group) from both • Operations • Future disposition • When to test? (paragraph 8 of handout)
Example 1 in Appendix A - Handout • Measurement at group level • Allocation of impairment loss • Only to LLA’s on pro-rata basis • Can limit allocation to FV of one or more LLA’s if FV higher than the resulting CV under pro-rata allocation of impairment loss • Establishes new cost basis • Write-downs are not restored if value subsequently increases or if CV becomes recoverable • Lowers future depreciation charges
Future Cash Flows • Directly related • Arise from use and sale of assets (or group) • Exclude interest • Un-leveraged asset cash flows • Entities own assumptions • Considering all available information • Can use probability weighted CF’s
Future Cash Flows - Continued • Remaining useful life • Of asset or of primary asset in group • Based on existing service potential • Cash flows for necessary maintenance included • Cash flows that are for improving service potential are excluded • Assets in development • Service potential when complete • Include interest to be capitalized as a cash flow
Goodwill Inclusion • Generally not applicable to real estate - no goodwill • Carrying value of goodwill assets • Used in impairment test only when asset group is or includes a reporting unit (as defined in FAS 142) • Lower level group with only part of a reporting unit • Will exclude goodwill carrying value in impairment test
Reporting & Disclosure • Loss is part of continuing operations • Included in “income from operations” subtotal • In the FS Notes • Description of assets and impairment • Amount of loss, if not on face of the FS • Fair value method used - market quote/DCF/appraisal/etc... • If FAS 131 (business segment), then identify segment to which loss pertains
Outline • Introduction • Assets to be held and used • Assets to be disposed of by sale • Valuation reserves (FV- cost to sell) • Presentation • Assets to be disposed other than by sale
Recognition • Identified as held for sale (in FS or notes) during period in which first meet para 30 criteria - Handout • General one year sale requirement, some exceptions • Others • Failure to continue to meet criteria • Reclassify as “held and used” • Newly acquired LLA • Held for sale if one year criteria met at acquisition and • Others criteria are likely to be met “within a short period”
Measurement • Lower of • Cost, or • Fair value less cost to sell • Not a new cost basis • Subsequent increases in value, net of disposal costs, can be booked up to previous losses recorded • Other • No depreciation while held for sale • Future operating losses are recorded as incurred, not part of valuation write down
Presentation • If a “component” of an entity • Then report current and prior periods as discontinued operations, net of income taxes if both: • Related cash flows and operations will be eliminated as a result of the sale, and • No significant continuing involvement after the sale • If not a “component” • Then continue to report as continuing operations • Related assets and liabilities • Separately identified on the balance sheet
Presentation - What is a Component • Component – operations and CFs clearly distinguished • Reporting or operating segment • Reporting unit • Subsidiary • Asset group
Disclosure in FS Notes • Description of assets & circumstances leading to expected disposal • Gain or loss recognized, if not on face of the FS • Revenue & pre-tax profit (loss) in discontinued operation, if applicable • FAS 131 segment information, if applicable
Change In Sale Plan • Measurement – subsequent decision not to sell after “Held for Sale” treatment has been applied, then • Reclassify on BS as held and used • Measure at the lower of • original cost less all depreciation that would have been allowed, or • Fair value on the date subsequently determined not for sale • Any gain or loss is part of continuing operations • Prior operations, previously presented as discontinued operations will, be reclassified as continuing
Outline • Introduction • Assets to be held and used • Assets to be disposed of by sale • Assets to be disposed other than by sale
Other Than Sale Disposals • Abandonment, exchange, or distribution to owners (spin-out) • Continue to be classified and accounted for as “held and used” until disposed, subject to impairment testing
Abandonment • Disposed • When it is no longer being used • If committed to a “plan” of disposal • Shorten useful life for depreciation • Temporarily idle is not abandoned
Exchanged or Distributed • Disposed • When exchange or disposition takes place • If tested for “held and used” impairment • Then use cash flows for remaining useful life to test for recoverability • Ignore anticipated disposition • If a “component,” then presented as discontinued operations (current & prior periods) at disposal date
Withholding Requirements for Foreign Partners in US Real Property Partnerships William S. Johnson, CPA Hunter M. Showalter Babush, Neiman, Kornman & Johnson, LLP www.bnkj.com
Summary of Code Section • Section 1441-withholding on nonresident aliens-flat tax • Section 1442-withholding on foreign corporations-flat tax • Section 1443-withholding on foreign tax-exempt organizations • Section 1444-Withholding on Virgin Island income
Summary of Code Section • Section 1445 - withholding on dispositions of US real property interests (FIRPTA)-Form 8288 • Section 1446- withholding on foreign partners in US partnerships - Forms 8804, 8805 and 8813
Taxationof Transfers of US Real Property Interests • Foreign Investment in US Real Property Tax Act of 1980 (FIRPTA) • FIRPTA treats gains and losses from dispositions of US real property interests as effectively connected with the conduct of a US trade or business • Purchaser of US real property interest is generally required to withhold 10% of the purchase price
Taxationof Transfers of US Real Property Interests • Tax due in 20 days of transfer • Exceptions to withholding requirements • Non foreign affidavit • FIRPTA withholding certificate -If filed by day of transfer, tax must be withheld but does not need to be paid to IRS until 20 days after IRS determination
Taxation of Repatriated Earnings • Interest & dividends paid by US corporations to foreign shareholders are generally subject to a 30% withholding tax. The withholding rate may be lowered due to tax treaty. • Foreign corporations that are engaged in business in the US are subject to a 30% branch profits tax on earnings not reinvested in active US business assets. Treaties may lower the rate or even eliminate the tax.
Taxation of OperatingIncome • US source income that is not effectively connected with the conduct of a US trade or business • 30% withholding tax on gross US source income • No deductions • No treaty reduction in rate
Taxation of OperatingIncome • US source income that is effectively connected with the conduct of a US trade or business • Taxation at regular rates on net income after deductions • Must file US tax returns
Federal Foreign Tax Withholding • Options for Calculation • Safe Harbor Option • Standard Option • Option 1 • Option 2
Federal Foreign Tax Withholding • Safe Harbor • 4 Installments Due 4/15, 6/15, 9/15, 12/15 • Each quarterly installment is 25% of prior year’s total withholding due on effectively connected income (ECI) provided that • Prior year was 12 months • Partnership filed prior year tax return • Prior year ECI was not less than 50% of current year ECI • Current year ECI can’t be twice that of prior year ECI
Federal Foreign Tax Withholding • Standard option • 4 Installments Due 4/15, 6/15, 9/15, 12/15 • 1st and 2nd installments based on annualized ECI using first 3 months of current year • 3rd installment based on annualized ECI using first 6 months of current year • 4th installment based on annualized ECI using first 9 months of current year
Federal Foreign Tax Withholding • Option 1 & 2 • Must elect to use either option each year by filing Form 8842 • Election must be made by 4/15 for calendar year partnerships • Options have different annualization periods than standard option
Federal Foreign Tax Withholding • Example - Standard Option • Assumptions • ECI for first 3 months is $106,000 • ECI for first 6 months is $203,000 • ECI for first 9 months is $290,000 • Foreign partner’s income is 60% of partnership income
Federal Penalties • Late payment of tax when tax is due - 1/2 of 1% for each month or part of a month the tax is unpaid • Failure to withhold under section 1446 may be subject to civil penalty equal to amount that should have been withheld • Failure to file 8804 w/IRS & furnish 8805 to correct recipient can carry maximum penalty of $250,000 AND $100,000 respectively
Georgia Foreign Withholding • Withholding is 4% of distribution made to non-Georgia resident (foreign partner), not based on income • Georgia is unclear on whether withholding is required for distributions made on income or distributions made on return of capital • File Form GA-V on 15th day after each month a distribution is made • File Form G-7 each quarter after distribution(s) are made • File Form G-2Aannually to foreign partners