More Pension Accounting Changes Coming - Watch Out Multiemployer Plans

Just read a good analysis of what may be coming in pension accounting changes. The FASB issued Statement 158 in 2006, which put net benefit plan balances on the balance sheet. This is supposed to be the start of more changes.

Which we didn't hear much about until yesterday's meetings. One thing that may change in the future is the institution of some accounting standards and disclosure requirements for multiemployer plans. This could be a significant issue for producers in union environments, as the union plans are almost always multiemployer plans.

While it uncertain what will happen, something will happen.

Fair Value Accounting

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This standard defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The new rule affects over 40 existing accounting standards — including those used to value stock options (FAS 123) and derivatives (FAS 133). And, for calendar year companies, it’s scheduled for implementation beginning the first quarter of 2008.

Advocates say that fair-value accounting will assist users of financial statements in obtaining a far clearer picture of the true economic state of a company. Achieving this “clearer picture,” however, is not without its difficulties. Concepts like exit price, highest and best use, in-use and in-exchange valuation premises, principal or most advantageous market, and the perspectives of market participants...; these are just a few of the concepts that must be understood and are introduced by Statement 157.

What does it mean for a concrete producer? More confusion. I'm a CPA and it is already confusing me.

IRS To Demand More Detailed Data Next Year

Per the Kiplinger Washington Letter, the IRS is expected to require additional detailed data from larger businesses in 2008:

• Form 1120 (C Corporations): Corporations will have to list entities that are at least 10% owners and any individuals who own more than 50%. Corporations will also have to disclose more details about foreign firms they own. New Schedule B for corporations with $10 million or more in assets will ask a variety of questions related to Schedule M-3, changes in accounting method and more; see a draft here.
• Form 1065 (Partnerships and LLCs): Expect this form to be revamped to get more details about cancelled debt, like-kind exchanges and more. A new Schedule C will have questions about majority owners and related-arty transactions.

The IRS though cut a break for small partnerships - those with assets under $1 million won't be required to file several other schedules. This is an increase from $600,000.

It will be pretty easy for producers with large asset bases to be subject to these new disclosures.

Accounting for Emission Credits - Part II

I happened to see an accounting professor from Detroit's Wayne State University this morning so I naturally took advantage of the situation to ask him his thoughts on accounting for emission credits. He reached the same conclusion I did in my earlier post on the subject - there isn't really a way under current generally accepted accounting principles.

One possible way to do so would be to recognize some kind of a deferred revenue/liability that would offset the value of the credits, but that doesn't accomplish much. The professor also brought up that the credit may only have value based on future events. He recognized that this result is a shortcoming of the current accounting model.

IRS Will No Longer Challenge Negative Additional Sec. 263A Costs

Section 263A is the Uniform Capitalization Rules relating to inventory. Enacted about 1986, it essentially requires companies that fall under its requirements to include more costs in inventory than they would otherwise do for financial accounting purposes. In other words, it was a revenue raiser - keep more costs in inventory and off the income statement.

Section 263A isn't usually a major problem for the typical producer who only has a few days inventory on hand. But producers with quarries, block operations or anything else that qualifies as finished goods can be subject to it.

Just read an article in CPA2Biz on that provides a pretty good summary on the subject.

Accounting for Emission Credits

I have been dealing with an interesting accounting question the last several days. A ready-mixed concrete producer received emission credits as part of shutting down a generator and replacing the power source with something much friendlier to the environment. The producer wanted to know if it was possible to assign a value to these credits in their financial statements, as they have value and can be sold to a third party.

There were two primary issues here:

1. What are the accounting rules for recognizing an intangible assets.
2. What is accepted industry practice.

The producer had already done some research on accounting rules. I did some double checking, and we both came up with the same conclusion: Generally accepted accounting principles do not allow a business entity to capitalize a self created intangible asset. The emission credits would be considered self created, as it resulted from the actions of the business entity. The Emerging Issues Task Force has kind of punted around this issue. The sense I get is that there could be changes in this area, but they haven't happened yet.

I also checked with some of my colleagues at producers throughout the country. Nobody had seen an instance similar to this, but the general consensus was that it wouldn't be allowed under current accounting rules. Industry practice can be an "out" at times, but there does not seem to be industry practice that supports doing so.

What is particularly annoying in this situation is that this producer's financial statements can be considered misleading yet be in conformity with GAAP. GAAP says you can't put this on the balance sheet, yet the producer has an asset that has value but can't be reflected in the financial statements. The producer could disclose the existence of these credits in the notes to their financial statements.

Further annoyance: say Wolverine Ready Mix buys the assets of Acme Ready Mix, and Acme owns some of these emission credits. Wolverine would be able to pro rate part of the purchase price to these emission credits.

Verdict: Unfair.

New Law Changes Tax Preparers' Role And Could Lead to Increase in Fees

Tucked into the May Iraq war funding bill was a provision that increasing the tax return reporting standards applicable to tax return preparers for undisclosed non-tax shelter items from the "realistic possibility of success" standard to the "more likely than not" standard. The American Institute of Certified Public Accountants considers this a major change in tax policy that was made without Congressional hearings.

This law puts "the standard for tax preparers to a level above the standard for taxpayers...(and) creates the potential for conflicts of interest between preparers and their clients, and consequently affect the nature of taxpayers' representation," an AICPA spokesman said in a July press release.

Why would fees increase? There will be situations where tax preparers will have to more research than in the past in order to meet the "more likely than not" standard. And who pays for that research? The taxpayer.

The AICPA is asking Congress to return the standard to the previous standard.

I'm not sure who snuck this one. This is a potential nightmare for the taxpayer, for the tax preparer, and for the IRS. Tax preparers might revert to including excessive disclosures in tax returns which would tax the IRS processing systems and could affectg the electronic filing initiative as well.

Let's hope it goes away.

Michigan Producer Gets Money to Go Green

My brother in-law is an environmental attorney and forwards me stuff periodically that affects the ready-mix industry. This article should be of particular interest to Michigan producers:


Katterman Trucking, a ready-mix concrete facility located in Hale, has received a $147,680 state pollution prevention loan from the Department of Environmental Quality. The company applied for funds under the Small Business Pollution Prevention Loan Program to construct a closed loop wash water recycling system for operations dealing with spent concrete mix materials from their mix-truck washing. The company estimates that these improvements will reduce water consumption by 116,000 gallons per year and completely eliminate liquid industrial waste.

"We are pleased to partner with Katterman Trucking in their efforts to keep Michigan's environment safe," said DEQ Director Steven E. Chester.

"This project is a demonstration of our ideal that environmental protection and economic growth go hand-in-hand."

The DEQ and the company's local lending institution, National City Bank, each contributed half of the loan proceeds.

"We're glad to finally get this pollution prevention project underway," said Jacquie Katterman, president of Katterman Trucking. "We're a small business; the savings from the low-interest loan are enabling us to move forward with this much needed project."

Businesses with fewer than 500 employees can apply for loans of up to $400,000 with a guaranteed interest rate of not more than 5 percent.

The short application helps businesses describe how their projects will eliminate or reduce waste through source reduction; environmentally sound reuse, and/or recycling; including water and energy conservation projects.

Loans are available to all private business sectors including farming, manufacturing, retail, and service. For more information, contact the DEQ's Environmental Assistance Center at 800-662-9278, or by e-mail at deq-ead-env-assist@michigan.gov.

Inventory and Cost of Goods Sold - The Rules Are Old

I have been reading lately commentary about how old many accounting principles really are. There are some parts of Generally Accepted Accounting Principles that have not changed in over 50 years. Think about how much things have changed in that period of time. Why hasn't GAAP caught up?

The rules for inventory and cost of goods sold are pretty old too - those rules are pretty much set out by ARB 29, which came out in 1947. You may have heard of the Financial Accounting Standards Board. FASB was preceded by the Accounting Principles Board. The APB was preceding by Accounting Research Bulletins, as in ARB 29.

But as I'm thinking about the accounting rules for inventory and how they affect a ready-mixed concrete operation, I think we're ok. The typical producer does not have a huge amount of inventory. You are limited in how much cementitious material you can have simply by the size of your silos. The aggregate stockpiles are generally limited by available space. If the producer is managing things right, inventory turns very quickly. The cost for inventory on the balance sheet will generally be a good reflection of what the inventory actually cost.

Compare this scenario to a business that maintains a broad parts inventory, many of which are for hard to find items. Such a business needs to keep items on hand - they can't easily afford to be out of stock on these items, especially if that is there marketing edge. Current inventory rules probably don't cut it for them.

The rules might change down the road, but here they are giving the producer good numbers.

Who Came Up With Your Chart of Accounts?

I wrote an article for the Summer 2004 Concrete In Focus, the NRMCA quarterly magazine, called "NRMCA Seeks to Standardize Industry Financial Reporting. I'm sad to say I don't think it is still out on the Internet.

The problem I've observed through my work in the industry is that most producer's chart of accounts have origins as follows:

1. It was the chart that came with the accounting system
2. It was the one they always had
3. It was set up by the computer consultant who installed the accounting system.

This is a shame, because a good chart of accounts will simplify your financial reporting, tell you more about your operating results, and allow you to benchmark your results to the annual Industry Data Survey.

I still have reprints of the article - just write and I will be happy to send it to you.