Newsletter by Hawkins Ash CPAs
In this edition
February 14, 2019

Accounting for Fees Paid in a Cloud Computing Arrangement

FinCEN Creates Exception to Beneficial Ownership Rule

Is a PTO Contribution Arrangement Right for Your Business?

Tax News Briefing – Unrelated Business Income Tax (UBTI) Updates
Accounting for Fees Paid in a Cloud Computing Arrangement
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract . This ASU amends the definition of a hosting arrangement to be “an arrangement in which the customer of the software does not currently have possession of the software; rather, the customer accesses and uses the software on an as-needed basis.” The ASU goes on to clarify the accounting for implementation, setup, and other upfront costs (implementation costs) incurred to implement a hosting arrangement that is a service contract.
A customer in a cloud computing arrangement that is a service contract is now required to follow the internal-use software guidance in Accounting Standards Codification (ASC) 350-40 to determine which implementation costs to capitalize as assets. A customer’s accounting for the hosting component of the arrangement is not affected by the new guidance. Implementation costs will be capitalized or expensed depending on the nature of the costs and the project stage (preliminary project stage, the application development stage, or the post-implementation stage) during which they are incurred. Generally, only costs associated with the application development stage are going to be capitalized. Overhead costs cannot be capitalized.
The capitalized implementation costs will be amortized over the life of the hosting arrangement, plus any reasonably certain renewal periods on a straight-line basis, unless another methodology is justifiable.
The amendments in ASU 2018-15 are effective for annual reporting periods beginning after December 15, 2020 for all nonpublic entities. Early adoption is permitted and should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Overall, entities should review hosting arrangements that are service contracts, determine whether costs are associated with the purchase of a software or are for a service, capitalize implementation costs with the purchase of the software that are incurred during the application development stage, and amortize these costs over the life of the hosting arrangement.
If you have any questions regarding the accounting for fees paid in a cloud computing arrangement, please contact your Hawkins Ash CPAs representative.
Contact: Justin Kudick, CPA
Direct: 920.337.4545
FinCEN Creates Exception to Beneficial Ownership Rule
As part of its efforts to combat money laundering and other fraudulent activity, the Financial Crimes Enforcement Network (FinCEN) issued its Beneficial Ownership Rule, effective for new accounts opened on or after May 11, 2018. The rule requires financial institutions , as part of their customer identification programs, to verify the identity of the beneficial owners of certain legal entities. Beneficial owners include individuals who, directly or indirectly, own 25 percent or more of an entity, as well as any individual who has “significant responsibility to control, manage or direct the legal entity.”

In a September 7, 2018, ruling, FinCEN created an exception to the beneficial ownership rule for legal entities that open new accounts on or after the effective date as a result of:

  • Rolling over a certificate of deposit
  • Renewing, modifying or extending a loan, commercial line of credit or credit card account that doesn’t require underwriting review and approval
  • Renewing a safe deposit box rental

The exception applies only to rollovers, renewals, modifications or extensions of the above product types that take place on or after May 11, 2018. It doesn’t apply to the initial opening of such accounts.

Financial Institutions Considering Use of Alternative Credit Data

Some lenders are considering the use of alternative data to expand access to credit for people with thin credit histories or negative items on their credit reports. By developing innovative techniques for analyzing a borrower’s ability to repay, lenders can expand  their pools of potential borrowers beyond those identified by traditional techniques.

Alternative data refers to information that may be used to evaluate creditworthiness but is not traditionally part of a credit report. Examples include rent payments, mobile phone payments, cable TV payments and bank account information. This may also include education, occupation and even social media activities.

It may take some time before alternative data techniques catch on among community financial institutions . In 2017, the Consumer Financial Protection Bureau (CFPB) released a “Request for Information” seeking information about alternative data and the modeling techniques used to analyze them. You can find the document, which discusses the benefits and risks associated with alternative data, at .

Supervisory Guidance Isn’t the Law

In a recent joint statement, the federal financial institution agencies clarified that supervisory guidance “does not have the force and effect of law.” Among other things, the agencies intend to limit the use of numerical thresholds or other “bright lines” in describing expectations, and examiners won’t criticize financial institutions for “violations” of supervisory guidance.
Contact: Jeff Danen, CPA
Direct: 920.337.4546
Is a PTO Contribution Arrangement Right for Your Business?
Many businesses find themselves short-staffed from Thanksgiving through December 31 as workers scramble to use, rather than lose, their remaining time off. Indeed, your workplace may resemble a ghost town if you limit how many vacation days employees can roll over to the new year. A paid time off (PTO) contribution arrangement may be the solution.

A PTO contribution program allows employees with unused vacation hours to elect to convert them to retirement plan contributions. If the plan has a 401(k) feature, it can treat these amounts as a pretax benefit, similar to normal employee deferrals. Alternatively, the plan can treat the amounts as employer profit sharing, converting excess PTO amounts to employer contributions.

A PTO contribution arrangement may be a better option than increasing the number of days employees can roll over. Larger rollover limits can result in employees building up large balances that create a significant liability on your books.

To offer a PTO contribution arrangement, simply amend your 401(k) plan. However, you must still follow the plan document’s eligibility, vesting, rollover, distribution and loan terms. Additional rules may apply. To learn more about PTO contribution arrangements, including their tax implications, please contact us.
Tax News Briefing – Unrelated Business Income Tax (UBTI) Updates
The Tax Cuts and Jobs Act of 2017 enacted into law last year included a hidden “gem” for not-for-profit organizations with unrelated business tax income (UBTI); tax-exempt organizations are now required to calculate UBTI separately for each trade or business. Prior to enactment, an organization’s UBTI was the aggregate income from all such trade or businesses reduced by the aggregate deductions for all such trade or businesses. Under the new law, the “sharing” of deductions between separate trades or businesses that generate UBTI is no longer allowed.

The proposed regulations released by the Internal Revenue Service (IRS) indicated that an organization that reports UBTI from more than one unrelated trade or business activity would be required to file a 990T for each separate trade or business. The effect of this reporting is that expenses from separate trade or businesses are not able to offset income in another trade or business. Organizations must carefully consider if their activities constitute more than one unrelated trade or business and report accordingly going forward.

The new law did not provide criteria for determining whether an exempt organization has more than one unrelated trade or business or how to identify separate unrelated trades or businesses for the purposes of calculating UBTI. Under the proposed regulations (IRS Notice 2018-67), the IRS provided that exempt organizations can use a “reasonable, good-faith interpretation” that considers all the facts and circumstances when attempting to identify separate trades or businesses. One option the IRS considers in the proposed regulations is the use of the North American Industry Classification System (NAICS) codes. The proposed regulations go so far as to indicate that the use of NAICS 3 to 6-digit codes is considered to be a reasonable, good-faith interpretation.

Unfortunately, until the final regulations are released, there will still be ambiguity on how to properly comply with this section of the Tax Cuts and Jobs Act of 2017. If you have any questions regarding your organization’s sources of UBTI, please contact your Hawkins Ash CPAs representative.
Contact: David Howell, EA
Direct: 920.337.4550
More Resources from CPA-HQ
Supervisory Priorities for 2019
This letter outlines the NCUA’s primary areas of supervisory focus for 2019, and is intended to assist you in preparing for your next NCUA examination.
Wisconsin Credit Union Charge Off Ratios
Stay updated with our PDF layout displaying charge off ratios released September 30, 2018.

Podcast: Parking Lot Regulations
Because of the Tax Cuts and Jobs Act, there will be many parking lot expenses that will be not-deductible for 2018.

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