Recently, there has been a lot of media attention on how companies with multi-store locations (e.g., restaurant chains and retailers) are misinterpreting store location lease accounting requirements. For this reason, it may be advisable for similar type companies to take a closer look at their current accounting practices regarding leased space.
The first issue generally relates to the use of different periods to recognize straight-line rent expense and depreciation of leasehold improvements, not including "rent holiday" periods in the lease term and accounting for landlord incentives. The accounting for leases with fixed or indexed rent escalation clauses, requires the use of the same lease term assumptions in determining current rent expense as depreciation expense for leasehold improvements, provided the leasehold improvements do not have a shorter useful life. In many cases, companies are finding that they had incorrectly calculated their straight-line rent expense and depreciation expense for financial statement purposes.
In addition, some companies were not charging operations with rent expense during "rent holidays" as part of the calculation of their straight-line rent expense. A rent holiday is when a company is permitted to occupy leased space to prepare the space for its intended use, but may not be required to pay rent to the lessor.
Finally, some companies have been netting tenant allowances against leasehold improvements in their balance sheets. Generally, tenant allowances are considered lease incentives for accounting purposes and should be reported as deferred rent with amortization over the lease term.
Please note that, while these circumstances can and most often do impact the computation of deferred income taxes for financial statement purposes, they generally have no direct impact on current federal or state income tax filings since taxing jurisdictions recognize rent expense without reference to future rent increases. In addition, separate tax rules govern the treatment of landlord incentives which, in certain circumstances, can be excluded from income.
The actual accounting can vary lease-by-lease and requires careful application of financial reporting requirements. Since calculations are highly technical – based on each store location's lease terms, the useful service life of the leasehold improvements, and possibly other factors – we encourage companies to work closely with their advisors in reviewing these matters.
Controlling property taxes, one of the largest expenses for any manufacturer, is critical to the bottomline. Unlike income taxes, property taxes must be paid even if a company is unprofitable.
Perhaps the greatest reason manufacturers routinely pay more than their fair share of property taxes is the sheer complexity of effectively managing their assets for tax purposes. Data verification, asset classification, asset valuation, obsolescence analyses, taxability analyses, monitoring and procuring available abatements or exemptions and construction cost segregation analyses are complex and time consuming processes — further complicated with every merger, acquisition, capital investment or divestiture that a manufacturing business may decide to make.
PwC provides an integrated approach for manufacturers called CLARITY (
Classification,
Lifing,
Asset
Review
Integrating
Technolog
Y). CLARITY seeks to provide personal property tax savings, both current and future. It brings all property tax management tasks under a single umbrella and provides a roadmap for the future, thereby simplifying the property tax function.
CLARITY utilizes a two-phase approach to help identify over-assessments of personal property taxes. In Phase I, PwC obtains relevant information and samples data to identify potential opportunities. In Phase II, PwC obtains additional information to help the client quantify, substantiate and implement identified savings opportunities. In addition, PwC transfers this knowledge for future reporting requirements, thereby potentially mitigating future overpayments.
CLARITY is designed to help you find significant personal property tax savings and improve cash flow.
The US Department of Labor (DOL) recently updated its rules governing overtime eligibility for workers under the Fair Labor Standards Act. Under the previous regulations, only workers earning less than $8,060 annually or $155 per week were guaranteed overtime. Under the new rules, workers paid less than $23,660 or $455 per week are now automatically guaranteed overtime regardless of their titles or duties. A number of salaried workers earning above this threshold will also gain the right to overtime under the new, stronger rules.
According to the DOL, the new rules strengthen overtime protection for 6.7 million low-wage workers, including 1.3 million white collar workers who were previously not entitled to overtime pay. Hourly workers are guaranteed overtime regardless of how much they are paid. Blue collar workers and manual laborers (e.g., construction workers, longshoremen, etc.) are also guaranteed overtime under the new rules. First responders (e.g., police, firefighters, etc.) now have strengthened overtime protections. Union workers under collective bargaining agreements are not impacted.
The new Overtime Security Rules have serious implications for the food & beverage industry. Employment of low-wage workers who are not getting overtime puts food companies at risk of being fined for non-compliance. Or worse, you could face a lawsuit by one of your workers. Additionally, the new rules have economic impacts that need to be understood.
PwC can work with you to help avoid these pitfalls and realize the financial implications of the new Overtime Security Rules. Our professionals are well acquainted with DOL rules and can provide a fresh, third-party analysis of your employee positions and practices to help you evaluate your exposure. We may also suggest ways for updating your current operations to make them more DOL compliant and still be fiscally sound.
One of the common goals of both the franchisee and franchisor is to make a profit. If the franchisee fails in this objective, the franchisor will likely fail also. Thus, both parties have a strong interest in helping the franchise succeed.
In this regard, the franchisor will want regular financial reports from the franchisee for measuring the status of the business and it is in the franchisee's best interest to deliver. The accounting records will be critical in supporting this effort. For any franchise, you will need to develop accounting systems that can, at a minimum, show start-up costs, available funds, projected income, projected balances, projected cash flow, break even analysis, ratio analysis and tax provisions.
Whether assessing the feasibility of a franchise or helping it stay on track, our professionals have the franchise knowledge and experience for helping you develop your reporting methods. We also have federal and state & local tax professionals on hand who can assist you in dealing with your tax issues – wherever you may be growing.
Our Transaction Services practice, comprised of a select team of senior deal professionals, can assist you in identifying, evaluating and executing various strategic alternatives for increasing the value of your business. Our professionals have deep experience on both the buy-side and the sell-side of various types of transactions, including divestitures, mergers, strategic/corporate acquisitions, joint ventures, corporate restructurings and leveraged buyouts. As appropriate, they might also facilitate, as well as help prepare your company for, introductions to some of the nation's leading private investment firms. This function is tailored to your particular preference and can be used to provide informational feedback well in advance of a capital need, as well as formal introductions germane to a proposed investment request.
Healthcare costs have escalated to become the second or third highest expense for US businesses. What does this mean for food & beverage businesses? For many, the pressure is on to introduce more efficiency into the buying power of healthcare.
A tactic towards controlling healthcare costs is to reduce inefficiencies associated with your healthcare dollars. By reviewing your vendor contracts, renegotiating the pharmaceutical benefits contract and conducting vendor performance reviews, you may reduce costs associated with your employee benefit program. Costs may also be reduced by reviewing and addressing the specific cost drivers (e.g., health risks) impacting your specific business. You may be able to trim costs through coaching and lifestyle change programs. Efforts in these areas may yield higher quality benefits for your employees and greater cost savings for all.
All food & beverage businesses operate under strict USDA/FDA, state and local regulatory guidelines, as well as comply with HACCP (Hazard Analysis and Critical Control Point) policies. Failure to meet these food safety standards can result in penalties, fines, business closure and – in some cases – even lawsuits.
Our HACCP-certified professionals can help. From food purchasing to consumption, we can evaluate and analyze your systems, policies and procedures as they relate to food safety and regulatory policy. We can help you mitigate your risk by identifying areas of opportunity for reengineering your compliance systems and procedures to improve their effectiveness. Our team can also help evaluate your risk in areas like food handling, safety and crisis management.
Should you find yourself facing legal action, we can support your efforts. PwC has provided support in traditional owner-manager disputes, as well as some of the more technical issues involving back-office operations, food safety and technology.
Our professionals have extensive experience advising clients and their legal counsel on damages theory and calculations, as well as on case strategy learned through involvement with large and small matters. We present data, information, analyses, and opinions in easily understood language and /or graphics for adversaries, opposing counsel, judges, arbitrators and juries.
What makes a food & beverage business successful? It's ultimately the locale. Even the hardest working business owner is destined to fail if his/her business is set up on a site that is unreceptive to the customer.
The key to selecting a good site is doing your homework and our professionals can help. We can gather the demographic, socio-graphic, economic, competitor and lifestyle segmentation research you'll need to make an informed decision. More importantly, we can also help you analyze the data and assemble the results in a way that is presentable to you, your management, your lenders and/or your investors.
In general, states impose a requirement for businesses to report and remit abandoned and unclaimed property to the state. Gift certificates, gift cards and other credits can often create large unclaimed property liabilities (statistics show that between 5 to 15% of these credits are never redeemed). If a gift certificate goes unredeemed, it could be escheatable in a state, unless there is an exemption for this type of property. Each state may have different rulings on the subject and the abandonment period for unclaimed gift certificates can vary significantly from state to state.
PwC combines financial, environmental and ethical capabilities to perform brand assessments, develop brand sustainability strategies and initiate compliance reviews of labor, environmental, societal, and food safety issues. These steps can help your brand to meet consumer standards – and expectations ndash; regarding safety, quality, privacy, and ethics and also focus on levels of certification around sensitive issues, such as genetically engineered foods and sustainable development. They also help evaluate the potential of extending your brand into other channels, like retail stores and web markets.
The Fair Labor Standards Act (FLSA), created by the US Department of Labor, regulates minimum wage, overtime, equal pay, recordkeeping and child labor for employees engaged in interstate or foreign commerce. It defines what is an "exempt" and "non-exempt" employee and sets specific pay standards for each.
FLSA has great implications to the food & beverage industry. For example, if you have exempt employees doing non-exempt work or vice versa, you could be fined for non-compliance with the Act. Or you could face a lawsuit by one of your employees.
PwC can work with you to help avoid these pitfalls. Our professionals are well familiar with FLSA and can provide a fresh, third-party review of your employee positions and practices to help you evaluate your risk exposure. We may also suggest ways for updating your current operations to become more FLSA compliant.
Benchmarking can be performed across three main levels: (1) within a firm against other units, (2) within a certain industry or (3) across industries. Comparing one firm or one industry against other industries helps one to identify issues and performance gaps that may not be apparent from a narrower perspective.
Effective cash flow management is crucial to competitiveness. A key value differentiator of PwC is our approach to this goal. In addition to tax, assurance and advisory services designed to meet your needs, we also bring to your attention potential opportunities to improve cash flow .
For example, overpayments of invoices can cost a food & beverage company a significant portion of its annual profits, thus adversely affecting the financial statements. Accounts payable technology is continuously enabling new and diverse payment methods that allow accounts payable systems to handle increases in volume and scale. However, this same technology may also inadvertently establish operational practices that cause accounts payable system inefficiencies and overpayments. PwC has developed software to search for and address these issues.
In addition, many food & beverage companies are not taking advantage of available sales/use tax exemptions. As a result, they may be overpaying sales/use tax to state and local taxing authorities. In other circumstances, companies may have improper sales/use tax remittance procedures – resulting in state and local sales/use tax audit assessments.
Lastly, food & beverage companies often have assets that are currently under-depreciated for tax purposes. By reclassifying those assets, they may obtain improved cash flow through accelerated depreciation benefits in future years. Similarly, many companies report personal property taxes based on book or federal tax figures instead of fair market value. By analyzing the reported value of the assets within a jurisdiction, large over-assessments of property taxes may be avoided.
One of the greatest challenges for food & beverage businesses today is gaining greater productivity out of their information technology (IT). To this end, our Advisory practice can assist. If you're in the planning stages, we can help you translate your IT strategy into tactics. We can also conduct an independent software analysis to help you reduce the risks/costs associated with a poor decision. If you already purchased technology, we can conduct a project performance review or help manage the project in an advisory/QA role. Finally, we can also conduct an IT assessment to determine how well your IT investments contributed to revenue growth and/or increased profitability.
In today's marketplace, data is collected for a variety of purposes. For example, with food & beverage companies, business transaction data is collected to facilitate the operations. This data may be used for tax purposes, year-end reporting, inventory management, marketing strategy, and business restructuring.
In the normal course of business, food & beverage companies are faced with a variety of strategic, tax, compliance, and legal issues that lend themselves to the use of statistics and economics, which could assist in understanding business operations. Our research team produces market and industry studies, cost/benefit analyses, finance studies, regulatory studies and litigation-related analyses. We might be able to help you perform damage or liability calculations (which can help reduce payments or increase profits), reduce time and cost of analyzing large volumes of data, assist your legal counsel to validate your legal position, or bolster your credibility.
