Accounting Archives

10 Ways to Protect Your Business From a Cyber Attack

December 5, 2018 By JAK + CO.

The words “cyber attack” have become part of our American vernacular. Unfortunately, there isn’t a standalone silver bullet that can keep your business safe from hackers and their seemingly ubiquitous malware. Preventing a cyber attack requires multiple layers of defense.

Here are 10 cybersecurity measures every business should practice:

Keep up with software patches and updates

Software providers such as Microsoft, Adobe, and Java—to name a few—release software updates and patches each month to address newly discovered security lapses. Don’t neglect them. If you do, you could create system vulnerabilities that hackers could easily exploit.

Run an antivirus program

Your antivirus program should scan your files in real time and your system on a weekly or, preferably, daily basis. Be sure to install antivirus software on all workstations (i.e., anything your end users operate on) as well as your server.

Employ a third-party spam filtering company

It’s nearly impossible to keep spam emails out of your inbox. There are numerous ways to block them, but the most effective solution is almost always a third-party spam filtering company. These companies receive your emails, scrub them using the latest spam-skimming filters, and then deliver the spam-free emails to your inbox.

Implement cloud-based malware protection

Cloud-based malware protection companies divert data going to and from your computer to their domain name system (DNS) servers. (The DNS is like an address book for the Internet.) These companies have real-time scanning capabilities that check the web or IP address your computer is trying to reach against known malicious addresses. If the address is bad, the company blocks the connection, preventing your computer from “talking” to the bad guys.

Maintain a corporate firewall

Most businesses have this basic cybersecurity measure in place. Nevertheless, it’s worth a mention. A firewall on the outside perimeter of your network is critical to filtering and blocking data. Think of it as the gatekeeper of your network.

Establish backup and disaster recovery protocols

Daily system backups have become antiquated. Today’s backups are image based: when the backup runs, it takes a snapshot of the entire system—typically on an hourly basis. If your system crashed or your hardware became disabled, you can simply take the snapshot to a different system and restore it to a new piece of hardware.

It’s important to test your backups regularly. Through our managed backup services, we test backups on a weekly or monthly basis, depending on our client’s needs. An entire disaster recovery test—during which all company servers are shut down—can help to ensure your system can be restored if needed.

Use password management and authentication methods

It goes without saying that your password shouldn’t be “p-a-s-s-w-o-r-d” or one that matches your name. Password management—promoting the use and regular updates of strong passwords across your organization—can help your company avoid this all-too-common mistake. You may also want to consider dual authentication, which requires end users to provide a second method of authentication, such as a code sent to their cell phone via text message, in addition to a password.

Manage the use of file-sharing applications

Many employees rely on file-sharing applications such as Dropbox and Google’s OneDrive to keep their files readily accessible. Obviously, this practice can lead to security deficiencies relating to company data. Are your employees using file-sharing applications? If so, consider developing a policy to address potential security lapses.

Train employees in cybersecurity

The end user is the weakest link in preventing a cyber attack. For instance, if an employee uses a weak password or falls for a phishing email scam, there’s little your cybersecurity measures can do. Training your employees on how to recognize and respond to potential threats can keep your business from becoming a victim.

Monitor, monitor, monitor

Keeping an eye on everything we just talked about—the software updates and patches, antivirus program, spam filtering, data backups, etc.—is critical. If you’re not monitoring them, they could go offline or fall behind on updates and you’d be none the wiser.

Actively maintaining a layered defense can help you thwart a cyber attack—and keep your business name from ending up as a late-night TV punch line. If you have questions or would like to learn how a managed IT service provider such as Minnesota based cyber solutions can help, give us a call today.

Capital Lease or Operating Lease? 4 Questions to Ask

November 12, 2018 By JAK + CO.

By Stephanie Loiland, CPA

Many companies choose to lease assets for a period of time instead of buying them outright. If you’re in this situation, it’s important to know whether you’re dealing with a capital lease or an operating lease. That’s because the type of lease will affect how you record it—and the payments you make to it—in your books.

A few additional differences between capital and operating leases to consider: Capital leases affect your balance sheet, which means they can also impact your covenants and ratio calculations. Also, capital leases allow the leased asset to be capitalized. If an asset is capitalized, it could possibly qualify for an accelerated depreciation option such as bonus depreciation or Section 179, providing you with a larger deduction in the year you sign the lease. Operating leases, on the other hand, require less administrative time to account for them and do not affect the balance sheet.

Not sure if a lease is capital or operating? Here are four questions that can help you determine its classification. If you answer “yes” to any of the questions, the lease is a capital lease. If you answer “no,” it’s an operating lease.

#1 – Is there a transfer of ownership?

If the lease states that your company retains ownership of the leased asset at the end of the lease, it’s a capital lease. In this case, the lease acts as a loan for you to purchase the leased asset.

#2 – Is there a bargain purchase option?

Many leases contain an option to buy out the leased asset at the end of the lease. If this option is less than the expected fair market value of the asset at the end of the lease, it represents a bargain purchase option. Leases that include a bargain purchase option are capital leases. The most common example of this type of lease is a $1 ending purchase option.

#3 – Does the lease period equal or exceed 75 percent of the asset’s useful life?

If the lease in question does not contain #1 and #2 above, the length of the lease is compared to the economic life of the leased asset. If the lease period is equal to or exceeds 75 percent of the leased asset’s useful life, it’s a capital lease. Your company’s capitalization policy should provide guidance on the length of life used for the type of asset being leased.

#4 – Does the present value of the minimum lease payments exceed 90 percent of the asset’s fair market value?

If the lease does not contain any of the above features, the present value of the minimum lease payments should be compared to the fair market value of the leased asset. The present value of the lease payments can be calculated by inputting the total amount of lease payments to be paid over the life of the lease into a present value calculator. The fair market value of the leased asset is equal to its cash price. If the calculated present value of the lease payments is equal to or exceeds 90 percent of the asset’s fair market value, the lease is a capital lease.

What to know about recording the lease and lease payments

Operating leases are simple to record. The payments are recorded each month as an expense in a lease expense account; no asset or liability is recognized on the balance sheet.

Capital leases, however, require the value of the leased asset to be capitalized and recorded as a fixed asset on the balance sheet. This fixed asset is depreciated over time like any other fixed asset purchase. The related lease obligation is also recorded as a liability on the balance sheet and payments are applied to the obligation with a portion segregated for interest expense.

Lease classifications will change in the coming year—stay tuned!

A new lease standard effective for years beginning after December 15, 2019, will change the classification of leases. As this effective date approaches, the small business CPA firm of JAK, will provide more information on what you can expect. In the meantime, if you have questions about lease classifications or the new standard mentioned here, please don’t hesitate to call.

5 Reasons Why Employee Ownership Could Be Right for Your Business

October 23, 2018 By JAK + CO.

By Kyla Hansen, CPA, CVA

An employee stock ownership plan, or an ESOP, is a retirement program that allows its participants to be owners of the company for which they work. As a business owner, you might consider an ESOP as a way to provide a valuable benefit for your employees. But this isn’t the only reason why an ESOP might make sense.

Here are five reasons why an ESOP could be right for your business:

You’re ready to start thinking of an exit strategy.

If you’re looking to transition out of your business, you have a few options: you can sell to an employee or family member, you can sell to an outside party, or you can implement an ESOP. Setting up an ESOP lets you transition the ownership of your business to your employees. This may make sense for you if you value giving back to your employees more than getting top dollar for the sale of your business.

You want to attract and retain quality employees.

It can be difficult to attract talented employees, especially in today’s marketplace. As a desirable workplace benefit, an ESOP can serve to differentiate your business from competitors. Giving your employees ownership can also help to increase engagement and workplace morale.

You wish to diversify your investment.

Is your business your largest asset? If so, establishing an ESOP gives you a way to redeem all or some of its stock, allowing you to reinvest those funds in other investments or companies. Depending on the circumstances, you may be able defer the gain related to the sale of the business if you invest it in qualified property under IRC Section 1042.

Gain a competitive advantage.

When contributions are made to the ESOP, they are allocated into the individual participants’ accounts. Taxes on these accounts are due at the individual level when redemption of their ownership occurs. In most cases, if a company is a 100-percent ESOP, it does not owe income tax on company earnings. This tax savings can provide extra cash to use for revenue-generating initiatives, such as expansion.

Give back to your employees.

The success of any business depends largely on the people it employs. An ESOP provides a way for you to give back to those who helped your business become what it is today.

Let us help you understand your options.

If you’re considering an ESOP, the team at JAK can help you explore your options. Together, we’ll discuss the pros and cons of an ESOP as they relate to your situation. To learn more about the benefits we’ve mentioned here, please give our St. Paul office a call.

Top 5 Ways the New Revenue Recognition Standard Will Impact the Construction Industry

October 3, 2018 By JAK + CO.

By Kyla Hansen, CPA

There’s been a lot of talk about the new revenue recognition standard and the effect it could have on the construction industry. Although the standard, known as Accounting Standards Update (ASU) 2014-09, was first issued by the Financial Accounting Standards Board (FASB) in 2014, it goes into effect for privately held companies—for periods beginning after December 15, 2018, to be exact.

This means that if you are a privately held company with a December 31 year-end, this change will impact your 2019 financial statements. The good news is percentage of completion isn’t going away! However, there are several nuances that will need to be considered.

Here are five changes you should be aware of:

1 – Combination and segregation of jobs will be based upon performance obligations

Contracts will now be defined and tracked by performance obligations—i.e., the underlying deliverables. This concept may cause certain contracts that have one shared performance obligation to be combined, even if they were previously considered separate. Additionally, this concept may also cause a contract to be segregated into separate pieces based on the number of performance obligations it includes. Going forward, each contract will need to be closely evaluated to identify performance obligations.
Change orders will also be impacted by this concept. Some change orders may create a new performance obligation, resulting in an additional job that would have to be tracked separately on the contract schedule, while others may not.

2 – Front-loaded costs will no longer recognize early profit

Significant costs incurred after a contract is obtained but before goods or services are transferred will need to be capitalized and amortized over the life of the contract. These costs include items such as mobilization and bond costs, and do not include bid, proposal, and selling or marketing expenses. This treatment applies only if all of the following criteria are met:
The cost directly relates to a specific contract
The cost generates or enhances resources that will be used in satisfying the performance obligation(s) in the future
The cost is expected to be recovered (directly or indirectly)

3 – The transaction price might not be the stated value on the contract

When determining a transaction price, the new standards leave room for more judgment regarding the circumstances surrounding a contract and also allow for greater reliance on historical experiences. For example, if the contract is for time and material, the transaction price will represent the amount you anticipate the job to require. In addition, contracts will need to be evaluated if there are variable items such as contingent income or damage provisions. The new standards allow for several methods to evaluate the contract value. We expect the most commonly used methods to be the following:

Most likely value method: Used when there are only two possible values. You select the value that is most likely to occur.
Expected value method: Used when there is a range of possible amounts; each scenario is weighted based upon probability of occurrence. This determines the transaction price that you will use on your job schedule as the contract amount.

4 – Anticipate changes to your financial statements

Your balance sheets will include new items and names.
Contract assets: This will include costs in excess of billings, unbilled receivables, contract adjustments for variable consideration, and capitalization of costs to fulfill a contract such as mobilization and bonds. As I mentioned previously, these costs will be amortized over the life of the contract.
Contract liabilities: This will include billings in excess of costs, accrued warranty, refundable consideration, and customer deposits.
Retained earnings adjustment: If you adopt the new standard ahead of time, you will need to adjust your retained earnings to account for open contracts at the end of 2018 or restate your 2017 amounts in order to comply.
Additional footnote disclosures: There is a considerable amount of additional footnote disclosures that explain your policies and methods for determining contract prices and related revenue recognition.

5 – Understand the impact on your ratios

In light of the new standard, you may need to discuss modifying metrics used to determine items such as loan covenants or bonding capacity. For example, a lending agent might not give credit for a variable consideration contract asset.

Don’t get caught off guard.

The new revenue recognition standard will go into effect in less than two months, which means now is the time to get ready for the changes I’ve listed here—and the others I haven’t. Don’t forget: Team at JAK can help you pinpoint the ways your business will be affected, so you can prepare with efficiency. If you have questions, please please contact our St. Paul office today.

How Indirect Construction Costs Can Impact Your Profitability

September 6, 2018 By JAK + CO.

By Joy McAdoo, CPA

Keeping tabs on direct construction costs for a project is pretty straightforward. Take your materials costs, for instance: X number of beams used on the project multiplied by cost of each beam = total cost. Easy! Dealing with indirect construction costs, however, can be another story.

Indirect costs relate to the performance of the job, but they’re hard to track to a specific project. In other words, indirect costs might benefit multiple projects.

Here’s the thing: If you don’t have the full picture of your cost to complete a project, you’ll get a false sense of your profitability. That’s why it’s so important to track and allocate your indirect costs as accurately as possible. Here are a few tips for getting started.

Identify your indirect costs.

Indirect costs can generally be divided into two buckets: labor and equipment. Some contractors may use only one bucket, while others may use both. Examples of costs that may be included in the indirect labor cost bucket include payroll taxes, workers compensation costs, and employee benefits. Examples of costs that may be included in the indirect equipment cost bucket include fuel, maintenance, insurance, and storage cost related to your owned equipment. The key is to decide what makes sense for your business to accurately determine your project-related costs.

So, we’ve covered labor and equipment, but what about the costs associated with running your business, such as general liability insurance, advertising, and office-related salaries? These costs are categorized as “overhead.” Although typically flat (i.e., they don’t fluctuate) and easier to predict, they’re often the hardest type of costs to allocate. That’s because it’s likely your overhead costs do support projects—just not 100 percent of the time. For this reason, it’s important to consider allocating some of your overhead costs to specific projects.

Keep separate ledger accounts for each indirect cost bucket.

Once you’ve determined the items included in your indirect costs, it’s time to track them. First, make sure your general ledger has a separate account group for each indirect cost bucket you’ve identified. This is where you will post these costs. Often times a contra account, which is an account with a balance that is opposite of the associated account (e.g., a credit instead of a debit), will be used for each bucket to easily show the total amount allocated to the jobs. From a reporting perspective, this ledger setup will allow you to see a whole bucket of costs and compare the actual amounts incurred to the amount that has been allocated.

Allocate indirect costs using a systematic and rational method.

Once you have your buckets set, you’re ready to allocate. While there are numerous ways to allocate costs, the method you choose should be systematic and rational. For instance, you could allocate labor costs based on direct labor hours incurred, or on a percentage of total cost per labor hour. Equipment costs could be treated in a similar manner—allocated by total equipment hours incurred.

Most often, contractors will estimate their total annual indirect costs for each bucket and set a predetermined rate to allocate those costs throughout the year. Others will use the actual cost incurred each month and allocate the full amount based on activity during that time period. The decisions surrounding how to allocate indirect costs will vary depending on the nature of your business.

Let your accounting software share the load.

Many robust accounting systems have built-in functionalities for indirect cost tracking and allocation. This begs the question: Do you know what your accounting software is capable of? If yours has this functionality, you could automatically track and allocate indirect costs with little effort after the initial setup.

Look forward to better insight into your business.

As I mentioned, keeping up with your indirect costs gives you a clearer picture of your profitability. Another benefit of tracking and allocating indirect costs is the ability to see your actual cost compared to what you expected. This is valuable information to have when bidding and estimating jobs. If you don’t know exactly what your indirect and overhead costs will be, how can you compile an accurate bid?

In order to successfully track and allocate indirect costs, you have to tailor the methods to your business. But don’t worry—at JAK we can help you figure out the right buckets and allocation approach, giving you the relevant financial information you need for increased profitability.

Here are 10 cybersecurity measures every business should practice:

Keep up with software patches and updates

Run an antivirus program

Employ a third-party spam filtering company

Implement cloud-based malware protection

Maintain a corporate firewall

Establish backup and disaster recovery protocols

Use password management and authentication methods

Manage the use of file-sharing applications

Train employees in cybersecurity

Monitor, monitor, monitor

#1 – Is there a transfer of ownership?

#2 – Is there a bargain purchase option?

#3 – Does the lease period equal or exceed 75 percent of the asset’s useful life?

#4 – Does the present value of the minimum lease payments exceed 90 percent of the asset’s fair market value?

What to know about recording the lease and lease payments

Lease classifications will change in the coming year—stay tuned!

Here are five reasons why an ESOP could be right for your business:

You’re ready to start thinking of an exit strategy.

You want to attract and retain quality employees.

You wish to diversify your investment.

Gain a competitive advantage.

Give back to your employees.

Let us help you understand your options.

1 – Combination and segregation of jobs will be based upon performance obligations

2 – Front-loaded costs will no longer recognize early profit

3 – The transaction price might not be the stated value on the contract

4 – Anticipate changes to your financial statements

5 – Understand the impact on your ratios

Don’t get caught off guard.

Identify your indirect costs.

Keep separate ledger accounts for each indirect cost bucket.

Allocate indirect costs using a systematic and rational method.

Let your accounting software share the load.

Look forward to better insight into your business.

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John A. Knutson & Co., PLLP

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