Risk with donor pledges

In the white paper Measurement of Fair Value for Certain Transactions of Not-For-Profit Entities, the AICPA’s Financial Reporting Executive Committee (FinREC) provides guidance to not-for-profits on considering risk when determining the fair value of a donor’s unconditional promise to give. Considerations may include:
  Assess the donor’s ability to pay. Check published credit ratings, financial analysis (such as cash flow and ratio analysis) or credit reports.
  Determine the donor’s commitment to honor the promise. Consider the extent of the donor’s involvement with the not-for-profit; the donor’s history of charitable involvement and giving; the donor’s financial circumstances; and the donor’s personal circumstances such as family situation, age and health.
  Study risk factors that affect certain groups of donors. Examples include economic conditions in certain geographical areas or industries.
 Assess the not-for-profit’s prior experience. Consider the extent to which the not-for-profit has enforced previous promises to give.
 Determine whether the underlying asset is held in an irrevocable trust or escrow. This may reduce default risk.
To account for risk, not-for-profits can use the discount rate adjustment (DRA) method or one of two expected present value (EPV) methods.
DRA discounts the projected cash flows by a risk-adjusted rate derived from rates of return for comparable assets or liabilities traded in the market. FinREC’s guidance for determining the discount rate includes:
  If the donor is an individual, consider using unsecured consumer lending rates. These generally are available from published sources such as major financial institutions. FinREC advises using those rates when the credit characteristics of the donor and borrowers of unsecured debt are similar.
  If the donor is a corporation, consider using the yield on its publicly traded debt. Look to the yield on debt issued by the corporation or by a comparable corporation. FinREC advises using that yield when the promise to give is similar to the publicly traded debt. If the donor is a private foundation, FinREC advises using the yield on publicly traded debt, whether issued by the foundation, a comparable foundation or a comparable corporation.
  Whether the donor is an individual or a corporation, consider factors specific to the promise. This information, including the payment terms and risk of the promise, will help assess the extent to which the promise to give is similar to publicly traded debt.
The EPV methods also account for risk:
  With EPV Method 1, discount the risk-adjusted expected cash flows by the risk-free interest rate. This rate may be indicated by the yield to maturity on U.S. Treasurys. The risk-free interest rate is appropriate because all risk is built into the expected cash flows. EPV Method 1 adjusts the expected cash flows for the systematic risk by subtracting a cash risk premium, resulting in a certainty-equivalent cash flow. Challenges in determining an adjustment for systematic risk can make EPV Method 1 impractical.
  With EPV Method 2, discount the expected cash flows by a risk-adjusted rate. This rate is based on the risk-free interest rate, adjusted for general market risk by adding a risk premium. The risk premium is necessary because not all risk is built into the expected cash flows in EPV Method 2. Journal Of Accountancy

Unemployment rate was flat at 8.3% in February

The unemployment rate held steady in February as 227,000 jobs were added to employer payrolls, the Department of Labor announced today. The unemployment rate is at a three-year low of 8.3%.Smart Brief

2012 Tax Notes

44 days left to file tax returns

• IRS issues 2012 automobile depreciation limitations
  The Internal Revenue Service on Friday released the 2012 inflation-adjusted depreciation limits and lease income inclusion amounts for passenger automobiles, trucks and vans. The 2012 tables include amounts for vehicles placed in service in 2012 for which bonus depreciation applies as well as limits for those for which bonus depreciation does not apply.JournalofAccountancy.com

Today's Accounting News from Neikirk, Mahoney & Company

Fed officials aim to assess economic outlook
Officials at the Federal Reserve are not expected to take any new measures to bolster economic growth, but will try to assess the outlook. The central bank has taken a number of steps in recent months to spur growth. The Wall Street Journal 


CFOs point to risk management as a growing area of concern
Risk management has become a growing responsibility for chief financial officers, with more than half of finance executives responding to CFO's Deep Dive Survey saying their risk management responsibility has gone up over the past two years. Two-thirds of CFOs cite customer demand and profitability as one of their biggest areas of concern. Learn how you can strengthen your company's ERM strategy at this AICPA workshop March 29 in New York City. CFO Magazine 


COSO explores six judgment "traps" and how to avoid them
Failing to consider opposing points of view and improperly defining problems are two key traps that lead to poor business judgment, according to a new white paper by the Committee of Sponsoring Organizations of the Treadway Commission. The paper defines six key judgment "traps" and offers advice on how to avoid them, and also outlines a five-step process for decision making. CGMA Magazine 


AIG is set to raise $6 billion from sale of Asian insurance unit
American International Group, the insurance company bailed out by the U.S. government, said it expects to raise $6 billion from the sale of shares in its AIA Group unit, which sells insurance in Asia. AIG said it will use the proceeds to pay off some of its $182.3 billion debt.Bloomberg (3/5), Reuters (3/5)


- The American Institute of CPAs

Payroll tax cut extension breezes through Congress

The House and Senate quickly approved the payroll tax cut bill on Friday, sending the legislation to the White House for the President's signature.

He has already promised to sign the legislation.

Authorities foil planned suicide bombing attack on Capitol building

By Debbie Siegelbaum - 02/17/12 01:36 PM ET

A potential suicide bombing attack of Congress was thwarted Friday when authorities arrested a suspect on his way to the Capitol.

The suspect has been identified as Amine El Khalifi, a 29 year-old illegal immigrant from Morocco residing in Alexandria, Va.

El Khalifi has been charged with attempting to use a weapon of mass destruction against property that is owned and used by the United States, according to a statement Friday from the Department of Justice.

The DOJ noted that the arrest was the culmination of an investigation of the suspect by the FBI, which included undercover agents posing as members of al Qaeda.

“The complaint filed today alleges that Amine El Khalifi sought to blow himself up in the U.S. Capitol Building,” wrote Neil MacBride, U.S. Attorney for the Eastern District of Virginia, in the DOJ statement.  “El Khalifi allegedly believed he was working with al Qaeda and devised the plot, the targets and the methods on his own.”

The explosives and firearm that El Khalifi allegedly sought and attempted to use had been rendered inoperable by law enforcement and posed no threat to the public, the DOJ added.

The arrest near the Capitol was carried out by the FBI and Capitol Police, wrote Capitol Police spokeswoman Sgt. Kimberly Schneider in a statement.

“This arrest was the culmination of a lengthy and extensive operation during which the individual was closely and carefully monitored,” Schneider wrote. “The U.S. Capitol Police was intimately involved in the investigation for the duration of the operation. At no time was the public or Congressional community in any danger.”

The FBI did not immediately respond to requests for comment, but lawmakers reacted swiftly to the news of the arrest.

The ranking member of the Senate’s Homeland Security and Governmental Affairs Committee, Sen. Susan Collins (R-Maine), said she had been in contact with the FBI about the arrest of El Khalifi.

“The brazen nature of this plot — targeting the U.S. Capitol building with the aim of killing innocent people and desecrating a symbol of our democracy — is disturbing,” she said in a statement.

"While we are still learning details, this plot appears to be yet another example of radicalized extremists attempting to attack Americans from within our borders,” Collins added.

Collins noted the sharp escalation in homegrown terrorist plots in recent years, citing a report by The Congressional Research Service that identified 36 arrests in such cases between 2009 and 2012.

"Today's arrest is a reminder that we must redouble our efforts to confront the threat posed by violent Islamist extremism, while making the clear distinction between a major religion followed by millions of law abiding Americans and a twisted ideology,” Collins concluded.

The chairman of the Committee on House Administration echoed the sentiment.

“Today’s incident serves as an important reminder of the need for constant vigilance to protect this nation and its capital from the threat of those who wish to do us harm,” wrote Rep. Dan Lungren (R-Calif.) in a statement following the arrest.

“I applaud the FBI and the United States Capitol Police in their efforts to protect the U.S. Capitol,” he added. “I thank the dedicated men and women in law enforcement in these and other agencies across the country.”

El Khalifi made his initial court appearance at 4:15 p.m. Friday, according to the DOJ. If convicted, he faces a maximum penalty of life in prison. - The Hill

President’s budget proposes AMT elimination, tax reform

BY ALISTAIR M. NEVIUS

FEBRUARY 13, 2012

President Barack Obama unveiled his proposed budget for fiscal year 2013 on Monday. Included in its 256 pages are several tax reform proposals, including plans to eliminate the alternative minimum tax (AMT), to repeal LIFO, and to tax dividends of high-income taxpayers at ordinary income rates. The budget estimates that the proposed tax changes would raise more than $1.5 trillion over the next 10 years. Overall, the document’s introduction claims that the budget would reduce the federal deficit by more than $4 trillion over that span.

At the same time, the Treasury Department issued its General Explanations of the Administration’s Fiscal Year 2013 Revenue Proposals (Green Book). In a prepared statement, Treasury Secretary Timothy Geithner called the proposed budget “a responsible, long-term deficit reduction plan that simplifies the tax code and asks the most fortunate to pay their fair share.”

Tax reform

The budget’s introduction sets out five tax reform principles:

1. Simplify the Internal Revenue Code and lower tax rates;
2. Reform inefficient and unfair tax breaks;
3. Decrease the deficit and protect progressivity;
4. Increase job creation and growth; and
5. Observe the “Buffett Rule.”

The budget characterizes the “Buffet Rule” as: “No household making over $1 million annually should pay a smaller share of its income in taxes than middle class families pay” (2013 budget, page 39). Its name derives from Warren Buffet’s observation that his effective tax rate is lower than his secretary’s.

The budget proposes that those making more than $1 million should pay at least 30% of their income in tax. The budget’s introduction says that “[t]he Administration will work to ensure that this rule is implemented in a way that is equitable, including not disadvantaging individuals who make large charitable contributions” (id.), but no specifics are provided.

The president is proposing that this “Buffet Rule” replace the current AMT.

To achieve these five tax reform principles, and “[t]o begin the national conversation about tax reform” (id.), the budget offers five specific proposals:

Tax cut expiration and estate tax changes

The budget proposes to allow some of the 2001 and 2003 Bush-era tax cuts to expire. These tax cuts, enacted by the Economic Growth and Tax Relief Reconciliation Act, P.L. 107-16, in 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27, introduced lower tax brackets and a lower capital gains tax rate. The cuts were extended by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312, and are scheduled to expire at the end of this year.

The budget proposes to let the lower tax rates expire for taxpayers with household income over $250,000 per year (that is, the 36% and 39.6% brackets would be reinstated).

The budget would also:

• Reinstate the limitation on itemized deductions for upper-income taxpayers;
• Reinstate the personal exemption phaseout for upper-income taxpayers;
• Tax qualified dividends as ordinary income for upper-income taxpayers; and
• Tax net long-term capital gains at a 20% rate for upper-income taxpayers.

The budget also proposes returning the estate tax to its 2009 parameters. Read more in the Journal of Accountancy