Pit & Quarry, February 2017

TAXES A good strategy involves making a list of any unusual issues during the year to discuss with the professional before any financial statements or tax returns are prepared NEW RULES RULE After more than a decade of debate and decisions about how businesses worldwide should report income the FASB the folks responsible for the GAAP published Accounting Standards Update ASU No 2014 09 Revenue From Contracts With Customers in May 2014 The new standards replace reams of industry specific guidance in the U S GAAP to arrive at a broad principles based method for almost all businesses worldwide to account for revenue Public companies must comply with them in 2018 while private companies and not for profit groups have an extra year The new standards call for the use of five steps to calculate the final income amount identify the contract identify the performance obligations or promises necessary to fulfill the contract determine the transaction price allocate the transaction price to the promises in the contract and finally recognize revenue once the performance obligation has been satisfied What could be clearer In general the new revenue recognition principle requires businesses using the accrual basis of accounting to record income only when it has substantially completed a revenue generation process In other words revenue is now to be recorded when it has been earned Going one step further the new guidelines recognize cash can be received in either an earlier or later period than when a contracts obligations are met when goods or services are delivered and related revenues are recognized Naturally all revenue realized during an accounting period is included in the aggregate operations income Obviously if there is any doubt whether payment will be received from a customer then the seller should recognize an allowance for doubtful accounts equal to the amount it is expected the customer will renege If there is substantial doubt that any payment will be received the aggregate business should not recognize any revenue until a payment is actually received COMPENSATION IFS Because many businesses have compensation plans for managers sales personnel shareholder employees executives or others that are tied to the operations revenue compensation arrangements are a big concern under the new revenue recognition standard In fact many of those working to implement the new revenue recognition standard are already encountering challenges with compensation policies Although the effective date for public companies is annual reporting periods beginning after Dec 15 2017 the new standard could result in earlier recognition of revenue that in turn could lead to higher commissions or bonuses In other words for some aggregate operations the standard will change the timing of when revenue will be recognised and therefore may change the way compensation is awarded under existing profit sharing arrangements THE RECOGNIZING REVENUE PRINCIPLE As mentioned the cornerstone of the accrual method of accounting is the socalled revenue recognition principle That principle dictates when revenue and expenses are recognized for both tax and accounting purposes Thanks to the new guidelines the aggregate business records revenue only when it has substantially completed a revenue generation process in other words when it has been earned To illustrate an aggregate business completes a job for its standard fee of 1000 It can recognize the revenue immediately upon completion of the job even if payment is not expected from the customer for several weeks A variation on the example is when the same business is paid 10000 in advance to provide sand gravel or crushed stone during a four month period In this case the business should recognize an increment of the advance payment in each of the four months covered by the agreement reflecting the pace at which it is actually earning the payment Of course if there is substantial doubt that any payment will be received then the aggregate producer should not recognize any revenue until a payment is received If a sand gravel or crushed stone business receives payment in advance it is recorded as a liability not as revenue Only after all work has been completed can the payment be recognized as revenue GROUND RULES FOR DEDUCTIONS AND INCOME Nearly all aggregate mining businesses will be affected by the expanded financial disclosures required under the new revenue recognition guidelines When claiming deductions or write offs and timing the receipt of income under the new guidelines there are a number of crucial steps every aggregate operation and business should take File a valid tax return There are options such as filing an amended return but there could be problems if the aggregate operations tax returns are not filed or not filed on time Obviously elections to take a deduction or defer income do exist however it is usually only with a timely filed return either by the due date or if with an extension 96 PIT QUARRY February 2017 pitandquarry com