REPOST: IBM stands behind cloud-computing account amid SEC probe

Many companies believe that cloud-computing is the future, and IBM is no exception. This AccountingToday.com article reports that the company is standing behind its cloud-computing accounting methods despite the SEC probe.

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(Bloomberg) International Business Machines Corp., facing a Securities and Exchange Commission investigation into how it reports revenue from offsite cloud services, said it stands by its accounting methods.

IBM is cooperating with the SEC in the probe, which it learned about in May, it said today in a filing. The company books its revenue from cloud services, such as storing customers’ data and software applications remotely, under generally accepted accounting principles, said Ed Barbini, a spokesman for Armonk, New York-based IBM.

“IBM’s reporting of cloud revenue is the result of a rigorous and disciplined process, and we are confident that the information we have provided has been consistently accurate,” Barbini said.

Chief Executive Officer Ginni Rometty has identified cloud computing as one of IBM’s chief sources of growth amid a slowdown in demand for hardware and for consulting services. The investigation at the company, known for consistently meeting analysts’ earnings estimates, underscores confusion about how cloud revenue should be booked, said Michael Cusumano, a management professor at the Massachusetts Institute of Technology’s Sloan School of Management.

“This is a murky area where the rules aren’t really established,” Cusumano said. “Companies treat cloud-computing revenue in different ways.”

About half of publicly traded software companies since 1990 have had to restate revenue because of misclassification of sales and product returns, or because they categorized ongoing payments for tech-support services as a sale of a product license, Cusumano said.

‘Disciplined Process’
While IBM doesn’t disclose its revenue from cloud services, it said the sales rose 70 percent in the first half of 2013 from a year earlier. In its filing today, the company didn’t provide details on what information the SEC was seeking.

“IBM has robust systems and controls to identify and validate what products and services count as cloud revenue,” Barbini said. “IBM accounts for cloud transactions exactly the same way as it would account for those transactions if they were not cloud—in accordance with GAAP.”

Florence Harmon, an SEC spokeswoman, declined to comment.

IBM has beat analysts’ earnings expectations in 32 of the past 33 quarters, according to data compiled by Bloomberg. On the other hand, it has missed sales estimates in seven of the past eight quarters.

More Probes?
The investigation may be the first in a series of probes into companies in the same industry as the SEC tries to clear up confusion and differences in standards, said Jack Ciesielski, owner of investment firm R.G. Associates Inc. in Baltimore and the publisher of the Analyst’s Accounting Observer.

The company has a goal of reaching $7 billion in cloud revenue by 2015, with about $3 billion from new business and the rest from current contracts shifting over to the cloud category.

IBM’s 70 percent growth rate for cloud-computing services in the first six months of 2013 was a slowdown from 80 percent last year. IBM has also said cloud revenue, which is spread across several divisions, tripled in 2011 from 2010.

IBM shares fell 1 percent to $195.04 at the close in New York. The stock has gained 1.8 percent this year.

The disclosure of the probe comes days after IBM won court approval for a $10 million settlement with the SEC for accusations of bribery in China and South Korea. IBM said earlier this year it’s the subject of a U.S. Justice Department bribery investigation related to contracts in Poland, Argentina, Bangladesh and Ukraine.

Autonomy Writedown
Hewlett-Packard Co., IBM’s archrival in the computer-services business, took an $8.8 billion charge last year to write down the value of Autonomy, a software company it acquired, amid allegations of accounting improprieties within the unit. Autonomy, whose products organize corporate customers’ data, had used aggressive tactics to inflate its results, a former executive told Bloomberg News last year.

Earlier this month, IBM acquired SoftLayer Technologies Inc., a cloud-computing storage provider. IBM paid almost $2 billion for Dallas-based SoftLayer, according to a person familiar with the deal.

Market researcher IDC estimates the cloud-computing market may more than double to $105 billion by 2016 from last year. SoftLayer specializes in public clouds—data-center networks that manage computing and software for businesses remotely. IBM is pairing those capabilities with private-cloud operations, building dedicated systems for individual customers.


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The social media leverage in the tax prep business

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Social media has revolutionized many facets of society, so much so that almost everything has come to be affected by this global phenomenon. But who would have thought that social media would also touch on the business of tax preparation?

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In fact, many tax prep firms have decided to use different social media platforms in marketing their services. Deciding that the best way to attract business is to go wherever the customers are, these firms have decided to jump in the bandwagon and went on to explore popular avenues, such as Facebook, Twitter, and LinkedIn.

And as more social media platforms arise, more tax preparers are taking advantage of every opportunity to make themselves positively known to the general public.

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A relatively new service which tax prep firms have been using lately is Yelp, a popular review site for consumers who want to learn more about local businesses. A recent Yelp search in Manhattan generated over 200 results of tax prep services reviewed by clients. For these services, their reputation lies on what their customers say—reviews which may range from acclaims to scathing denigrations.

 This is a clear breakaway from traditional marketing strategies. But because the population is slowly but surely migrating to cyberspace, all these efforts might all be worth it in the long run.  

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Resolving differences: FASB and IASB should agree on credit loss standards

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Intending to encourage both the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to settle their differences on the issue of credit loss standards for the purpose of converging financial instruments, 15 US banks have written a letter stating their wishes to the chairmen of the FASB and the IASB.

Last year, after initially agreeing on some proposed changes to the standards, the FASB and the IASB ended their meeting without coming to a compromise. Since then, both institutions have released divergent drafts regarding their proposed changes to the standards, especially to loan loss provisioning and expected credit losses for loan impairment.

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Recognizing that all the players and movers in the financial marketplace are going global, the banks, which include Capital One, JP Morgan Chase, and Bank of America, realized that there is a need for a common set of high-quality credit-impairment standards. Although they realize that reconciling different points of view of the two institutions may be difficult, they believe that coming to an agreement on what those standards should be is more important, as loan impairment is a big part of credit risk management.

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Isidor Hefter, CPA, specializes in tax planning and research for both corporations and individuals with high net worth. He is also adept at estate tax planning and providing representation for the Internal Revenue Service and other state and local government organizations. More information about his services can be found at this website.

Anatomizing the financial statement

Whether they are managing a small business or a big corporation, entrepreneurs will always have to deal with financial statements in their line of work. According to BusinessDictionary.com, a financial statement is “used to show a company’s performance over a certain period of time, generally every fiscal quarter.” It shows quarterly gains and losses, and reflects a company’s financial standing.

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Because of their importance, financial statements have become a part of any business venture, thus requiring entrepreneurs to be proficient in reading and interpreting these documents. Reading a financial statement may be daunting at first, but anatomizing it to its three essential components may help neophytes in conquering this challenge.

Components of a financial statement

1. Balance sheet. This contains the assets, liabilities, and net worth or shareholder equity of a corporation. Put in simpler terms, it represents what the company owns (e.g., bank accounts and real estate) and how much the company owes to others (e.g., loans and accounts payable).

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2. Cash flow statement. This is a report of cash inflow and outflow, and provides a clear picture of where all the company’s money goes. It is further subdivided into three parts: financing activities, operating activities and investment activities.

3. Income statement. This shows how much revenue the company was able to take in for a specified time period, alongside the amount used to come up with that revenue.

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Isidor Hefter has been affiliated with Rosen Seymour Shapss Martin & Company, LLP for more than 20 years and is currently a senior partner at the firm. More updates on the accounting industry may be found on this Facebook page.

REPOST: New IRS data: Rich got richer, but paid lower tax rate as stocks gained

The groundbreaking study from the Internal Revenue Service shows that the richest Americans pay lower taxes despite their high income. Find out the reason why in this Forbes.com article.

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The Internal Revenue Service today released a new report showing that in 2010, as the nation’s stock markets recovered, the richest Americans saw their share of all national income rise and their effective federal income tax rate fall.

In 2008 and 2009, the wealthy saw their share of national income decline and their tax rates rise, in large part because their more lightly taxed capital gains fell. But in 2010, the top 1% (the 1.35 million families with adjusted gross income above $369,691), reported 18.87% of all AGI, up from 17.21% in 2009. Meanwhile their average tax bill (as a percentage of AGI) fell to 23.39% in 2010, from 24.05% in 2009. The trends were even more favorable for the top 0.1% (the 135,000 households with income above $1.6 million), who captured the lion’s share of the 1%’s income gains, garnering 9.24% of all AGI, up from 7.94% in 2009. The tax rate paid by the top 0.1% fell to 22.84% in 2010 from 24.28% in 2009, meaning they paid a lower rate than their less rich fellow 1 per-centers. As a result, while the share of all income taxes paid by the top 0.1% also rose—to 17.88%, from 16.91% in 2010—it rose by less than the increase in their share of total national income.

The IRS report also shows that in 2010, 10,666 families reporting AGI of more than $10 million realized 5.5% of the nation’s taxable income, but a stunning 41% of all long term capital gains and corporate dividends taxed at the special low 15% rate; that 41% share equals $152.4 billion in such income, almost double the $77.9 billion in such long term gains and dividends reported by families with AGI above $10 million in 2009. The IRS hasn’t yet released its analysis of how the richest 400 fared in 2010, but it seems likely that their income share rose and their tax rate fell, since they’re even more dependent on lightly taxed capital gains. (In 2009, the richest 400 saw their income fall 25%, while their tax rate rose to 19.9%.)

Even more than a recovering economy, a surging stock market pads the reported incomes of the rich. After falling 38.5% in 2008, the S&P 500 rose 23.5% in 2009 and another 12.8% in 2010—meaning more investors finally had gains to realize. The S&P was flat in 2011 and up 13.4% in 2012, which was likely a huge year for capital gains realizations by the rich, as they took gains in advance of an expected increase in the tax rate for 2013. As part of the fiscal cliff tax deal, the capital gains rate was raised from 15% to 20% on taxable income above $400,000 for a single or $450,000 for a couple. In addition, as part of ObamaCare, a new 3.8% Medicare surtax applies to capital gains and investment income, to the extent a single filer has AGI above $200,000, or a couple has AGI above $250,000.

The IRS’ Statistics of Income division also published today preliminary estimates for 2011, which are less detailed by income level and don’t include tax returns filed after September 30th 2012, even though rich folks with the sort of extensive investments and partnership interests Mitt Romney has (a preliminary version of his 2011 return was 379 pages), often apply for extensions which allow them to delay filing until October 15th. Still, the IRS’ preliminary 2011 numbers—when compared directly with the IRS’ 2010 preliminary release—suggest the better off may have continued to increase their share of the national pie during 2011 too. While capital gains were down a tad, 23.4% of income in the 2011 preliminary numbers was reported by those with AGI above $250,000, up from 22.9% in 2010.

The 2011 preliminary report shows AGI on all tax returns (a total of 145.6 million were filed) increased by 3.1% to $8.3 trillion, with wages and pensions and annuities both rising 4% and corporate dividends rising 9%. But with the Federal Reserve keeping interest rates low, taxable interest fell 17%, a big hit to retirees who rely on interest from bank CDs or taxable bonds. Meanwhile, taxable distributions from IRAs rose 12%. The number of tax returns reporting taxable unemployment compensation declined 12%, while the amount of taxable unemployment benefits reported fell 23%.

Just 31.8% of the nation’s taxpayers claimed itemized deductions in 2011, down from the 32.6% of taxpayers who itemized in 2010. The falling share who itemize could be a factor as Congress considers whether to limit itemized tax deductions as part of a tax reform.

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Legal duty: How to avoid tax fraud

The word ‘fraud’ has an objectionable appeal to anybody who hears it. Put ‘tax’ in front of it, and it becomes especially bad. Tax fraud is a violation of one’s legal duty to voluntarily file income returns or pay the supposedly correct amount of income, employment, and other taxes one owes the state. The IRS alerts anyone who gets involved in any illegal strategies to avoid paying taxes as he may be obliged to pay fines with interests or be imprisoned for a period of time.

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Misrepresenting income or falsifying numbers are two of the most common methods of committing tax fraud. However, the government discusses other ways of breaking tax laws. Here are a couple of them:

• Unscrupulous tax return preparing. When a taxpayer needs the service of a tax preparer, the client has to make sure of the honesty and capacity of the preparer to do his job within the confines of the law and avoid fraudulent tax returns.

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• Non-filing of returns. Many citizens reason out that taxes are voluntary or illegal. Most of the time, the US courts see these arguments as frivolous, and they have imposed penalties to those who repeatedly believe these arguments as true.

To avoid tax frauds, financial penalties, or imprisonment, the government has routinely emphasized the power of education. The IRS, for one, has an abundant supply of resources to educate individuals and other entities about the adverse effects of tax scams and frauds.

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Isidor Hefter, CPA, specializes in tax planning for companies and high net worth individuals. This Facebook page contains more helpful tips on how to avoid tax payment pitfalls.

REPOST: US personal incomes jump ahead of New Year tax rise

This BBC.com article talks about the efforts of high earning US citizens to beat the New Year tax rise.

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 US personal incomes jumped 2.6% in December, the biggest monthly increase since 2004, as high earners sought to beat a New Year tax rise.

The month was marked by accelerated bonus and dividend payments, the US Commerce Department said.

Income tax cuts dating back to George W Bush's presidency were due to expire in the New Year as part of the "fiscal cliff" of tax rises and spending cuts

Despite the boost to incomes, consumer spending rose only 0.2% in the month.

"Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates," the Commerce Department's Bureau of Economic Analysis said.

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In the event, the tax rises went ahead only for individuals earning more than $400,000 (£250,000), as part of a last-minute deal negotiated between Republicans and Democrats in Congress to avert the fiscal cliff, with the top tax rate rising from 35% to just under 40%.

Capital gains tax also rose on 1 January. Special factors

The 2.6% increase in incomes in December came on top of an unusually high 1% rise the month before.

Other factors also exaggerated the income increases in the two months, including lump-sum benefit payments handed out in December, and the loss of income for many in the New York area during October because of disruption from Storm Sandy.

Excluding all of these special factors, incomes rose 0.6% in November and just 0.4% in December - in line with the trend increase during the rest of the year.

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 Most of the windfall income was not spent, with the US personal savings rate increasing from 4.1% of income in November to 6.5% in December. 

Indeed, the seasonally-adjusted growth in spending slowed noticeably in the run-up to Christmas, from 0.6% in November to 0.2% in December.

"Consumers finally realised about the tax increase so they pulled back a bit on their spending during the holiday season," said Sam Bullard, senior economist at Wells Fargo.

Consumer spending is expected to remain weak in the New Year, owing to the impact of a rise in payroll taxes, also agreed as part of the fiscal cliff deal.

Personal incomes are also likely to experience a drag in January and over the coming months, reflecting the fact that most of the increase recorded in December was merely income that had been brought forwards.

Isidor Hefter is an expert in tax planning and estate planning. This Facebook page contains the latest financial news.