Letters

Different Standards for Nonpublic Companies?
Many members of the AICPA believe FASB-promulgated GAAP should not be applicable to nonpublic business entities (NBEs). The AICPA’s council now is asking FASB “to identify and implement a process that would evaluate, where appropriate, potential changes to recognition, measurement and disclosure differences from current GAAP as applied to public companies [that then would apply to NBEs].” (See page 1 of The CPA Letter, July 2005, www.aicpa.org/pubs/cpaltr/index.htm.)

I infer that the thrust of that request is for FASB to take current GAAP, pare it down and reduce it to fit NBEs. That approach will not work. There will be no way to determine or justify a reduced FASB-promulgated GAAP as being appropriate for NBEs but not for public companies. What would FASB do—cut out or modify FASB accounting or disclosure for leases, pensions, income taxes or consolidation, to name but a few? Where would FASB stop cutting or modifying? Would FASB add something that is not part of GAAP generally but would be applicable only to NBEs?

I suggest a different approach. The AICPA should ask FASB to allow two sets of GAAP for NBEs: (1) FASB GAAP as it is today and as it may be in the future or (2) fair value accounting for NBEs’ assets and liabilities. Most NBEs are owned by individuals. Individuals prepare their financial statements on the basis of fair value pursuant to AICPA Statement of Position 82-1, Accounting and Financial Reporting for Personal Financial Statements. So it is a small step, and a logical one, to have NBEs prepare their financial statements on the basis of fair value.

FASB soon will issue a standard on “fair value measurements.” It would be easy for it to specify that NBEs use that standard if they wish to prepare their financial statements on the basis of fair value.

The AICPA then would have to deal with auditing and reporting on the fair value financial statements of NBEs. CPAs are qualified and competent to audit and opine on that which can be determined as a matter of fact by reference to objective evidence such as cash balances and balances of receivables and payables. But they are not qualified or competent to express opinions on the fair value amounts of noncash assets and liabilities, which can be determined only judgmentally and subjectively—for example, the fair value of land and buildings. NBEs would have to engage independent, third-party valuation experts to opine on the fair value amounts of noncash assets and liabilities. The reports of both the CPA and the valuation expert then would need to be included in the financial reports of the NBEs.

I think commercial bankers, who are the primary users of the financial reports of NBEs, would be very pleased to receive the reports with asset and liability amounts at fair values. For the first time, they would be receiving relevant, decision-useful information.

Walter P. Schuetze, CPA
Boerne, Texas

SOX and Nonissuing Organizations
“Stay Out of Trouble” (JofA, Aug.05, page 67) highlighted an important issue regarding the confusion over auditing standards for nonissuing organizations. Certainly, some of this confusion stems from the underlying intentions of Sarbanes-Oxley.

The act, hastily issued in response to the lack of accountability and transparency in the financial reporting process, aimed to draw focus to management and auditors. To that end, it has been effective. Post-legislation, there has been greater attention paid to the actions of accountants and management, imposing additional responsibility on them to do the right thing. Yet, Sarbanes-Oxley’s efficiency in attracting attention has inadvertently pushed other preexisting rules and standards out of the spotlight. This is especially true in nonissuing organizations, where standards were indistinct to begin with. Perhaps due to the sweeping scandals and spectacular failures upon which it arose, Sarbanes-Oxley and its creation, the PCAOB, have become widely known across all types of organizations. Ironically, nonissuing organizations now know more about PCAOB standards than they do about their own set of guidelines.

As the article asserts, it is important for auditors and their clients to know about the various sets of standards in existence. I would add only that in order to mitigate the confusion over the applicability of standards, it is just as important to become familiar with the standard-setting bodies. For instance, the more recently formed PCAOB has assumed rule-making responsibility from the AICPA’s Auditing Standards Board over public companies only. Organizations should be mindful of the three standard-making bodies in the United States, whose jurisdictions are as follows:

Public Company Accounting Oversight Board (PCAOB)
— Publicly traded companies.

AICPA’s Auditing Standards Board (ASB)
— Privately held companies.
— Not-for-profit organizations.

U.S. Government Accountability Office
— Federal, state and local governments.
— Not-for-profit organizations receiving federal funding.

Through clarifying the lines of responsibility for these standard-making bodies, it is hoped entities such as nonissuing organizations can become enlightened in their steps toward compliance.

In related news, the recently formed U.S. Auditing Standards Coordinating Forum, composed of representatives from the PCAOB, ASB and GAO, also seeks to reduce confusion over varying auditing standards. It is hoped this forum will be able to preserve the importance of ASB and GAO auditing standards for the appropriate organizations, while fostering the output of the PCAOB.

Gordon Ng
Staten Island, N.Y.

Taxing LTC Premium Refunds
“LTC Insurance for Owners and Executives” (JofA, Mar.05, page 53) speaks about the advantages of using a C-corporation as a funding vehicle for long-term-care insurance. The article is quite useful. However, one issue needs to be clarified.

The article talks about the “return or refund of premium” rider that many LTC insurance policies offer. It states: “When the policy contains a ‘refund of premium’ feature, the insured’s beneficiary can receive all premiums paid into the policy as a tax-free benefit at the death of the insured (IRC section 7702B(b)(2)(c)). This can be especially attractive for stockholder/employees as the premiums were originally deductible, fully or partially, by the company.”

Clarification is needed because how the premium refund is characterized makes a big difference.

IRC section 7702B(b)(2)(C) is part of a list of requirements an LTC insurance contract must meet to be classified “qualified” under HIPAA. It says any “premium refunds and dividends paid under the contract are to be applied as a reduction in future premiums or to increase future benefits.” Clear enough.

The next paragraph talks about exceptions to this rule for a refund made on the death of the insured or upon a complete surrender or cancellation of the contract that cannot exceed the aggregate premiums paid. No decrease in premiums or increase in future benefits is possible as a contract no longer exists.

The last part of the section says: “Any refund given upon cancellation or complete surrender of the policy will be includable in income to the extent that any deduction or exclusion was allowable with respect to the premiums.”

The bottom line is that if a return of premium is activated at the death of the insured, the refund may be subject to income tax. At times there is a desire to characterize these refunds as being the same as life insurance, but they aren’t.

The open discussion of business tax issues surrounding LTC insurance is a valuable endeavor, as this is a relatively new subject on most professionals’ radar screens. The limited pay option (10 pay) just happens to be one of the best ideas in the marketplace today, but may not be available forever. The more clarity and definition that is brought forward benefits all.

Professionals with a fiduciary responsibility to their clients would be well served to increase their client value propositions by discussing “insured LTC plans” and “limited pay options” while the opportunity still presents itself.

Jeff Reilly, LUTCF
East Longmeadow, Mass.

Author’s reply: Unfortunately, an article is not a textbook and, therefore, cannot address every possible detail, provision and interpretation in the limited space allotted. Fortunately, there are many sources of useful information about long-term care and long-term-care insurance available to CPAs and others, so a practitioner who wants to immerse himself in greater detail can do so.

Paul Devore, CLU, CFP
Encino, Calif.

A Social Security Solution
“Promises to Keep” (JofA, Jul.05, page 41) did an excellent job of comparing the seven social security reform bills to current law. I’m glad it reminded CPAs “it’s time to get involved” to “help the public understand the plans before us and perhaps help shape even better ones.” With those comments in mind, I submit the following thoughts on the topic based on my research:

There is a plethora of proposals by politicians and academicians regarding ways to fix Social Security, including the seven plans discussed in the article. The majority of these proposals, however, are not citizen-friendly ways to solve the problem.

Although politicians would never admit it, the real reason for the Social Security problem is that the U.S. government robs Social Security to pay for wasteful pork-barrel and sinkhole social programs.

My research reveals the Social Security Trust Fund currently holds $1.6 trillion of nonnegotiable U.S. government bonds. If these payroll taxes had been invested in commercial mutual bond and/or stock funds, the $2.3 trillion needed in the future to fully fund Social Security benefits would be available.

The personal accounts proposal is a smoke-and-mirrors sham and will not solve the Social Security problem. Since many Americans have limited knowledge of how to invest their contributions in personal accounts, this proposal could increase the poverty rate for elderly Americans in future years.

The long-term survival of Social Security will require legislation allowing the Social Security Trust Fund to invest the $1.6 trillion and future payroll taxes in commercial mutual funds. The income cap on payroll taxes should be increased to 90% of all income earned, including the ludicrous incomes earned by overpaid executives.

Hope springs eternal!

Grover L. Porter, CPA, PhD
Hendersonville, Tenn.

CBT Too Easy? Think Again
The concerns about how easy the new CPA exam is, expressed in the letter “CBT: Too Easy?” (JofA, Sept.05, page 12), are valid but unnecessary. I took the last paper and pencil exam in November 2003. The exam was very difficult, and I was able to get credit on only two parts. I finished the other two parts now computer-based in 2004 and became a CPA in 2005.

Having experienced both versions of the exam, I can tell you the CBT format is much more rigorous. Time pressures have increased, content has expanded and simulations have been added. You see an increase in passing rates because people now have time to focus on one part at a time. However, the trick is having the endurance and focus to pass the entire exam during an 18-month window. Not many people have the stamina required to study for the test that way. The result is that candidates with less capability are weeded out. The bottom line is that if the exam was easier you would not see the drop in candidates that followed its implementation.

The new CPA exam, as all previous versions, is challenging and serves well to protect the public and the profession.

Jose M. Jimenez, CPA
Horseheads, N.Y.