Fall 2013 Issue of Horizons

horizons A publication by RubinBrown LLP Fall 2013

How Key Industries ARE FARING WITH AN Improving Economy

PLUS Lessons Learned From Jim Castellano

Accounting Changes Proposed for Affordable Housing Industry Why Accounting and Financial Reporting for Governments is Different than Businesses Medical Practices: New Models to Adapt to the Ever-Changing Healthcare Environment ▲ ▲ ▲ ▲

TABLE OF CONTENTS

horizons A publication by RubinBrown LLP FALL 2013

Features

1 3 6

Welcome from the Managing Partner

RubinBrown Adds New Leaders & Promotes 11 to Partner, 14 to Manager

Chairman’s Corner

Chairman James G. Castellano, CPA

36

Timely Reminders

Managing Partner John F. Herber, Jr., CPA

Industry-Specific Articles

Denver Office Managing Partner Gregory P. Osborn, CPA Kansas City Office Managing Partner Todd R. Pleimann, CPA

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19

30

manufacturing & distribution

gaming It’s All About Expansion for the Gaming Industry The gaming industry continues to flourish on both a global and national level. Gaming expansion is everywhere

life sciences Life Sciences Patent Issues and Funding Updates In June 2013, the White House task force on high- tech patent issues issued an initiative designed to facilitate continued innovation and help ensure the continued development and delivery of high-quality patents in the U.S. real estate Accounting Changes Proposed for Affordable Housing Industry Proposed changes in the accounting of investments in affordable housing tax credits would bring about clarity for investors and potential major increases in investments in low income housing tax credits. public sector Why Accounting and Financial Reporting for Governments is Different than Businesses Governments’ accounting and financial reporting standards and resulting financial statements are similar to those of businesses, but maintain a number of key differences.

Supply Chain – Push or Pull?

Optimizing your supply chain has become a key driver to success for manufacturing and distribution companies. Being able to deliver the right product at the right time to the customer has become a baseline expectation. Medical Practices: New Models to Adapt to the Ever-Changing Healthcare Environment Medical practices have long looked at surgery centers, clinics and other ancillary services for additional revenue sources to support their core businesses. However, medical practices have learned over the years that they need to be cognizant as healthcare laws have potentially limited the ability of practices to have ancillary service models. professional services

Editor Dawn M. Martin

– expanded event space, hotel rooms,

gaming floor square feet, gaming positions/types, and gaming regulations.

Art Director Jen Chapman

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22

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Horizons, a publication of RubinBrown LLP, is designed to provide general information regarding the subject matters covered. Although prepared by professionals, its contents should not be construed as the rendering of advice regarding specific situations. If accounting, legal or other expert assistance is needed, consult with your professional business advisor. Please call RubinBrown with any questions (contact information is located on the back cover). Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

not - for - profit Sustainability for Not-For- Profit Organizations The last few years have been very difficult for many not-for profit organizations; and while there have been

some mergers and/ or dissolutions, most organizations have

survived, although clearly some better than others.

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26

construction

The Slow Road to Recovery

Readers should not act upon information presented without individual professional consultation.

The recovery of the construction industry continues to move along slower than any of us would like. The good news is that positive sentiment within the industry seems to be increasing.

WELCOME FROM THE MANAGING PARTNER

Positive Signs for Economic Recovery

While there are mixed reports out there about economic recovery, most experts agree that the overall trend should be for continued growth during the last quarter of this year and, in fact, accelerate in 2014. The housing market is stronger, consumer confidence is at its highest level since 2008, and unemployment is down. It’s welcome news for all of us who have worked so hard for our families and businesses during this long recession. Every quarter, RubinBrown sends out its Quarterly Economic Benchmark Survey to all of our clients and contacts. We ask participants to share with us how their organizations have performed over the ending quarter, as well as provide their outlook for the upcoming quarter. For the second quarter of 2013, 59% of respondents indicated that their organization’s performance had either slightly or significantly improved. This compares to only 40% of respondents indicating likewise for the first quarter of 2013.

John F. Herber Jr., CPA Managing Partner

With regard to the outlook for the remainder of 2013, 90% felt that the economy would either stay the same or improve.

Here at RubinBrown, we’re grateful for how well we’ve fared through the economic recession. We attribute our sustained growth to our steadfast dedication to “totally satisfied clients.” We’ve never wavered from this commitment and we’re honored to have continued to serve you over these difficult years.

I look forward to a very bright future.

I would welcome your feedback on ways we can continue to deliver “totally satisfied clients.” Please email me directly at john.herber@rubinbrown.com.

Pleasant reading,

www.RubinBrown.com | page 1

Ethics Seminar

MARK YOUR CALENDARS

Denver RubinBrown Center October 29, 2013 8-10 a.m.

Kansas City Doubletree Hotel October 30, 2013 8-10 a.m.

St. Louis Danforth Plant Science Center October 31, 2013 8-10 a.m.

Year-End Accounting & Tax Update

Denver RubinBrown Center December 4, 2013 8-10 a.m.

Kansas City Doubletree Hotel December 3, 2013 8-10 a.m.

St. Louis Danforth Plant Science Center December 5, 2013 8-10 a.m.

SEC Update

Glean insight into the latest tax legislation. Learn more about how new accounting rules will affect your business. Find out how your organization can benefit from business strategies and innovative ideas. Throughout the year, RubinBrown is an excellent source for learning and insight. For Upcoming RubinBrown Seminars

Denver RubinBrown Center January 8, 2014 8-10 a.m.

St. Louis RubinBrown Center January 7, 2014 8-10 a.m.

Not-For-Profit Update

Denver RubinBrown Center January 22, 2014 8-10 a.m.

Kansas City Doubletree Hotel January 21, 2014 8-10 a.m.

St. Louis Danforth Plant Science Center January 30, 2014 8-10 a.m.

Public Sector Seminar

Registration will be available 5 weeks prior to each event at www.RubinBrown.com.

Denver RubinBrown Center February 7, 2014 8 a.m.-5 p.m.

Kansas City Doubletree Hotel February 4, 2014 8 a.m.-12 p.m.

St. Louis RubinBrown Center January 29, 2014 8 a.m.-12 p.m.

RUBINBROWN NEWS

RubinBrown Promotes 11 to Partner

Tim Farquhar serves clients in a variety

With more than 10 years experience, Chris Coleman serves as a partner in

A partner in RubinBrown’s Assurance Services

of industries, performing business valuations and conducting due diligence examinations related to mergers and acquisitions.

Group, Amy Altholz also serves as a partner in the Not-For- Profit Services Group, for which she serves as vice-chair.

RubinBrown’s Tax Consulting and Construction Services Groups.

Jeff Schuetz is a partner in the State and Local

Maureen Pardo is a partner in

A partner in Business

Advisory Services, Brandon Loeschner is also the practice leader of the

Tax Services Group and is a member of the firm’s Construction and Manufacturing & Distribution Services Groups.

RubinBrown’s Tax Consulting Services Group,

focusing on clients in the real estate sector.

Gaming Services Group and the Data Assurance and Analysis Team.

A partner in the Assurance Services Group, Jeffrey Sparks

Christina Solomon performs forensic

Tracy Senf serves as a partner in both RubinBrown’s Assurance and Real

accounting investigation and analysis, and provides litigation consulting services to businesses in a variety of industries.

works with public and

Estate Services Groups where she provides audit, consulting and tax services.

privately held organizations, specializing in manufacturing and distribution.

Ted Williamson is a partner in the Assurance Services Group,

Scott Voss is a partner in RubinBrown’s Tax Services Group. He assists clients with tax compliance and consulting services.

focusing on clients in the not-for-profit, government, and college and university sectors.

www.RubinBrown.com | page 3

RUBINBROWN NEWS

RubinBrown Adds New Partner

Jeff Kane has joined RubinBrown as a partner in the firm’s Wealth Management Services Group. Kane provides tax and financial consulting to high wealth individuals and federal income tax consulting to businesses in a variety of industries, from small start-ups to multinational corporations. He also has extensive experience in merger and acquisition tax consulting and structuring.

RubinBrown Promotes 14 to Manager, Hires 1

In addition to serving in the Assurance Services Group, Renita Duncan also

HannahCastellano is in the Assurance

A member of RubinBrown’s Manufacturing & Distribution Services

Services Group and works with

clients in the life sciences, manufacturing and distribution, and not-for-profit industries.

Group, Andrew Bardot provides assurance and benefit plan audit services to clients.

serves in the firm’s Not-For-Profit and Public Sector Services Groups.

Terri Kerbe has been promoted to manager in the

Paul Iadevito is a manager in ABACUS Recruiting,

Zack Fritz serves as a manager in the Tax Services

Entrepreneurial Services Group where she focuses on healthcare and the not-for-profit sector.

which he joined in 2007 and has over 15 years of experience in the executive recruiting and sales industries.

Group where he specializes in construction as well as manufacturing and distribution.

Kyle Murphy provides clients with financial due diligence,

Brandi Lawyer serves clients in a variety of industries, including colleges and universities, not-for-profit, public sector and real estate.

Amanager in the Tax Services Group, Mindy Krueger

also provides clients in the construction and not-for-profit industries tax consulting and compliance services.

business valuation, forecasting and projection, and litigation consulting services.

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Stacy Peter serves clients in the construction and not-for-profit industries with risk-based audit planning and business performance analysis services. Lynnae Robinson serves as a manager in the Professional Services Group working with contractors, law firms and professional service clients.

Mark Ommen serves clients by providing financial audits, business performance analysis, and SEC registration and filing services.

Aaron Pollard is vice chair of the

Transportation & Dealerships Services Group and provides clients with tax planning and business performance analysis.

Chad Oberg recently joined the Tax Services Group, where he provides federal,

Jason Stalberger provides tax services to clients primarily in

manufacturing and distribution and cable and television communications.

state and local tax consulting and compliance services to clients.

www.RubinBrown.com | page 5

CHAIRMAN'S CORNER

Lessons Learned by Jim Castellano, CPA

N ow that some green shoots are beginning to sprout from the earth scorched by the horrid global financial crisis, I hope that we have all learned lessons that will make us stronger, more likely to survive (maybe even prosper) when the next crisis arrives. History does have a way of repeating itself and wise business people make a point to learn from our past in order to succeed in the future. Here are some of my thoughts on lessons learned. Focus on Cash Flow So many businesses that were prospering in the early part of the new millennium suffered during the crisis because they focused on revenues, net income or some metric other than cash flow. Inventories were built in anticipation of continued growth and prosperity, land was acquired with the expectation that the demand for new housing would never end, plants were constructed to increase capacity, and on and on. Making cash flow a key indicator is a wise decision in light of history. We learned that we cannot pay salaries with inventory, banks do not want our land in payment of our borrowings, and creditors don’t care about our excess capacity. Manage and Minimize Fixed Commitments A wise person once told me, “never build a building without a back door.” The point being, flexibility in managing fixed obligations is worth something. Of course, we have to make long-term commitments at times for real estate or supply contracts, but do so with thought to provisions that might be negotiable to minimize the impact of adverse events. Take Extraordinary Care of Existing Clients While Seeking New Opportunities RubinBrown’s existing clients provide the capital in the form of ongoing business to enable us to pursue new opportunities. Always keeping the existing clients in mind, doing all that is necessary to continue to earn their confidence and loyalty, will increase the chances of achieving new goals and surviving, if not prospering, in difficult times.

Jim Castellano, CPA Chairman

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Seek Opportunities to Acquire Businesses and Recruit Talent All of our competitors may not have fared as well from the economic downturn. Perhaps their teams have grown weary of the stress of the economy, do not have the energy to continue with enthusiasm, or simply have not recovered. Many great people are employed by these companies and they may be looking for new opportunities in an organization that has the energy, ability and enthusiasm to tackle the challenges ahead.

Growth by acquisition and/or by talent recruitment is an exciting lesson learned from the financial crisis.

Attend to Your Personal Financial Affairs The stress of managing a business in difficult economic times sometimes causes us to lose focus on our personal financial situations. All energy is poured into stabilizing the business. Yet our personal financial well being is what will make the difference in the long run in the quality of the lives we live. Having a good handle on your personal financial position and a good plan for your personal financial future provides the comfort and stability needed to help weather the next financial storm.

I am sure that our readers can share many more lessons learned and I encourage you to do so by contacting me at james.castellano@rubinbrown.com. Experience is the knowledge we gain from the “school of hard knocks.” Those who survived the financial crisis have a well- earned degree and can now put it to good use by focusing on the future with lessons learned from the past.

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GAMING

It’s All About Expansion for the Gaming Industry by Brandon Loeschner, CPA, CISA & Daniel Holmes, CPA, CIA

T he gaming industry continues to flourish on both a global and national level. Gaming expansion is everywhere – expanded event space, hotel rooms, gaming floor square feet, gaming positions/ types, and gaming regulations. International Growth Driven by the spectacular development of gaming in Macau, China, the industry continues to experience exponential growth. Since surpassing the Las Vegas Strip in 2006, Macau has grown to a $38 billion gaming

market. Some have even touted Macau as “Vegas on steroids.”

The growth of this market has contributed to the strong cash flow and earnings growth for the three U.S. gaming companies (Wynn, Sands, and MGM) that invested in the Macau market. Beyond Macau, gaming is continuing to expand internationally with the gaming markets in Singapore and the Philippines reporting double-digit year-over-year growth rates.

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∙ Russia is looking to build a Vegas-like resort development in the Primorsky territory. Although the territory is a remote region in the far east of Russia, the development would be accessible by those in northern mainland China that cannot access the Macau market. U.S. Growth Domestically, the United States gaming market has bounced back and surpassed pre-recession levels. In 2012, the United States commercial and tribal gaming industry reached $65 billion in revenues. This is primarily attributed to the expansion of gaming in regional markets, another steady year of growth in tribal gaming, and a rebound in the Las Vegas gaming market.

With gaming revenues increasing exponentially, other countries are also looking toward gaming expansion, the most notable of which include Spain, Japan, and Russia.

∙ Spain is currently considering a “Eurovegas” resort development near

Madrid. The development would be led by Las Vegas Sands CEO, Sheldon Anderson. However, prior to the development, the Sands is requesting a smoking ban be overturned and online gaming be limited to poker.

∙ Japan is currently exploring the development of casino gaming, with

Caesars Entertainment, Las Vegas Sands, and Genting Gaming all expressing interest in the market. Analysts are predicting the market will legalize gaming in the next 12 to 18 months.

Comparison of Gaming Revenues Between Macau and Las Vegas Strip

$40B

$38.0B

$35B

$33.5B

$30B

$25B

$23.5B

$20B

$14.9B

$15B

$13.6B

$10.4B

$10B

$7.1B

$6.8B

$6.7B

$6.2B

$6.1B

$6.1B

$6.0B

$5.8B

$5.8B

$5.6B

$5B

$0

2005

2006

2007

2008

2009

2010

2011

2012

Macau

Las Vegas Strip

Sources: Nevada Gaming Control Board and UNLV Center for Gaming Research

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GAMING

located on the former Stardust site, and is developing a $2 - 7 billion dollar casino.

∙ A private group of investors is renovating the shuttered Sahara Casino and developing the SLS Casino and Hotel . When examining the Las Vegas Strip market, Las Vegas Sands President of Global Gaming Operations, Rob Goldstein, put it best in his second quarter earnings release, “...the Las Vegas market was challenging” in 2012 but will “slowly get better” in 2013 and the coming years.” Local Growth Regionally, growth continues to be the byproduct of states expanding gaming, as illustrated in RubinBrown’s 2013 Gaming Stats . Even during the recession, the industry continued to open new casinos in the regional gaming markets. This helped increase regional gaming revenues during a time when the Las Vegas Strip was down in the number of visitors, conventions and gaming revenues. It also ensured the overall gaming industry would grow when Las Vegas bounced back. Below is a summary of regional gaming expansion efforts and projects that have contributed (or are poised to contribute) to the growth of the gaming industry since the beginning of the recession in 2007: ∙ Pennsylvania has seen the opening of seven casinos, the legalization of table games in July 2009, and the rapid growth in gaming revenues allowing the state to surpass New Jersey as the second largest gaming market. ∙ Maryland saw the legalization of gaming in 2008, the opening of four casinos, the ongoing development of a fifth casino in downtown Baltimore, and the expansion of gaming in 2012 to include table games. A sixth license will be awarded in the next 12 months.

As the proxy to the U.S. gaming industry, the Las Vegas Strip is showing signs of strength and continued optimism toward the overall economic recovery. Net gaming revenue for companies on the Las Vegas Strip grew 5.6%, increasing by $345.7 million, in the second quarter of 2013. With the overall economy recovering, the Las Vegas Strip is starting to see large construction projects again. It is estimated there is approximately $5 - 10 billion in planned construction activity on the Las Vegas Strip, including: ∙ Caesars Entertainment is developing the Linq retail center next to the Flamingo and constructing the world’s largest observation wheel. ∙ MGM Resorts International is developing an arena behind the Monte Carlo and New York, New York casinos.

∙ Resorts World acquired Boyd Gaming’s stalled (since 2007) Echelon project,

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∙ Ohio saw the legalization of gaming in 2009, the development and opening of four casinos, and the opening of two racinos. ∙ Specific to the St. Louis market, Penn National acquired the Harrah’s Casino & Hotel and is working through a $61 million investment effort to re-brand the facility as a Hollywood Casino & Hotel. In addition, Pinnacle Entertainment is completing an $82 million expansion of its River City Casino that includes the construction of a 200-room hotel, a 10,000 square-foot multi-purpose event center, and a covered parking structure with approximately 1,700-spaces. In summary, gaming continues to thrive around the world. Growth remains focused on emerging markets that are introducing gaming. Meanwhile the economic recovery is producing modest growth and economic development in existing markets.

2013 Commercial & Tribal Gaming Stats Now Available

To view the entire publication, go to http://tinyurl.com/Gaming-Stats

RubinBrown’s Gaming Services Group Many gaming operations throughout the nation seek out RubinBrown’s accounting, consulting, and tax services.

Brandon Loeschner, CPA, CISA Gaming Practice Leader Gaming Services Group 314.290.3324 brandon.loeschner@rubinbrown.com

Daniel Holmes, CPA, CIA Gaming Practice Leader Gaming Services Group 314.290.3346 daniel.holmes@rubinbrown.com

www.RubinBrown.com | page 11

NOT-FOR-PROFIT

Sustainability for Not-For-Profit Organizations by Judy Murphy, CPA

T he last few years have been very difficult for many not-for profit organizations; and while there have been some mergers and/or dissolutions, most organizations have survived, although clearly some better than others.

When faced with declining or threatened revenues, the first and natural inclination of many organizations is to reduce costs. As the economic downtrend reached the not-for-profit sector, many were forced to take a hard look at their expenses and cut costs where possible. At the same time, few not-for-profits wanted to reduce their capability to offer the programs for which they had been established. Efficiency and “doing more with less” became crucial. Still today, controlling costs is a fundamental component of sustainability.

What are some of the factors that are critical in attaining/maintaining sustainability?

Financial Strength One key area relates to the not-for-profit’s financial position and resources and the ability to react to changing conditions.

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ensure their continued connection to the organization’s mission. Staying true to the mission and ensuring program outcomes and impacts are at appropriate levels help ensure sustainability.

On the revenue side, organizations have also had to adapt. Not-for-profits that receive government funding, whether federal or state, have had to adapt to changes in that revenue source. Focus has also been on maintaining other revenue streams and finding new sources of funds to supplement declines elsewhere. Some organizations were forced to use reserves that had been accumulated to weather the economic storm; in fact, this is one of the reasons reserves (and a reserve policy) are necessary – to help the organization through challenging times, particularly those which the entity can’t control. As the economy improves, these organizations should revisit their reserve policies, analyze where they stand with respect to reaching the goal reserve level stated in the policy, and establish a plan to re-accumulate those reserves. Having timely and detailed financial records that allow the organization to actively monitor its financial position facilitates the organization’s ability to proactively identify future challenges and take action as necessary. Mission Clarity A second key area related to sustainability is mission clarity. Funders are very focused on program outcomes and impacts and often request such information. The economic downturn forced not-for-profits to use this information internally to ensure outcomes were measurable and positive. Specifically, existing programs have been analyzed for purposes of determining the number of clients served/reached and the true “costs” of running each program versus the benefits derived. In addition, as organizations looked for new revenue-generating activities, new and existing programs were reviewed to

IRS Focus on Unrelated Business Income Filings A report completed earlier this year provides insight into the examination issues raised by the Internal Revenue Service (IRS). Thirty-four colleges and universities were examined as part of an IRS project. The same issues are likely to be raised in a variety of nonprofit organization returns. Below is an overview of one of the issues. The IRS disallowed losses on 75% of the returns examined. This includes net operating loss carry- forwards as well as current year losses. Net operating losses (NOL) must be substantiated. The report does not go into detail. As a general rule, the prior years’ returns do not prove the NOL. The taxpayer may need to produce books and records for the loss years. With a twenty year loss carry-forward, the IRS essentially has an opportunity to review a return filed up to twenty years ago. If nothing is produced other than the loss year return, it is likely the IRS will disallow the NOL. Alternatively, if there is an adjustment to a loss in a current year, the IRS may assert that the prior year losses are disallowed until the taxpayer can prove the effect of a comparable adjustment in all prior years for the issue identified in the current year. Your losses just vanished.

Look for more details on this topic on our website at www.RubinBrown.com.

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NOT-FOR-PROFIT

Charity Watchdog Agencies and “The Overhead Myth” Two questions that are frequently raised by donors/funders include:

1. How much does your organization spend on overhead?

2. Is that too much?

An organization’s overhead percentage is generally calculated by dividing the total of general & administrative and fundraising expenses by total expenses.

The traditional thinking from a donor or charity watchdog perspective has been that the lower this percentage is, the more efficient the organization is. Further, watchdog agencies have often historically based their evaluations of charities, at least in part, on this percentage. RubinBrown previously covered this issue in our Spring 2011 Horizons article, in which we noted “while there is little evidence that this calculation will completely disappear from the evaluation process, it does appear that reliance on it may be waning.” Evidence of the latter came earlier this summer in a letter released by three of the country’s leading sources of information on not-for-profits – BBB Wise Giving Alliance, Charity Navigator and Guide Star. In their “Letter to the Donors of America,” they caution against overemphasis on this ratio when making funding decisions. The letter cites research which shows that when organizations focus too much on minimizing overhead, they starve themselves of the freedom they need to invest in themselves to best serve the people and communities they were created to serve. The writers don’t believe the overhead percentage should be totally ignored but do encourage donors to keep it in perspective while considering other factors of performance such as transparency, governance, leadership and results. Some watchdog agencies have already taken steps to minimize the emphasis on this ratio in rating charities and increase the emphasis on charities’ results. It remains to be seen whether, and how quickly, donors and funders will react and/or make changes to their funding criteria and evaluation methods. The letter has generated significant publicity and social media activity. As this paradigm shift could have a significant impact on the management of not-for- profits over time, we encourage you to follow and participate in the discussions. In fact, the letter states that “many charities should spend more on overhead” such as “investments in training, planning, evaluation and internal systems”.

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Leadership A third key component of sustainability is leadership. This encompasses a variety of types of leadership including day-to-day, volunteers, and resource management. Staff and boards have had to work together – closer than ever – to ensure vision and expected outcomes are in alignment while adapting to a shifting economy. Additionally, it is now imperative that all board members have an understanding of the organization’s finances. The finance and/or audit committees still play important roles in the financial area; however, all board members need some level of understanding of the organization’s revenue streams, expenses, and financial position. This is accomplished by periodic (monthly or quarterly) reviews of the not-for- profit’s statement of activities (revenues and expenses – budget vs. actual) and the statement of financial position. Too often, the focus has strictly been on comparisons of revenues and expenses to budget. Equally important is knowledge

of the entity’s financial position – its assets, liabilities, and net assets, including any restrictions thereon. Economic conditions have also driven organizations to analyze how resources are being utilized. In addition to keeping an eye on cash flows, not-for-profits have evaluated their use of buildings, vehicles and other fixed assets. Depending on the organization, considerations have ranged from how to fund needed major improvements to what to do with excess building capacity after terminating a program for which funding dried up to buying vs. leasing. All are important decisions in a changing economy to ensure optimal utilization of these significant organizational assets. To weather past as well as future challenges, organizations must continue to focus on their sustainability, emphasizing financial strength, mission clarity and leadership in these efforts.

RubinBrown’s Not-For-Profit Services Group As a recognized leader in the not-for-profit sector, we have the resources essential to serve arts and cultural organizations, foundations, private schools, religious organizations, social service agencies, trade and membership associations and other not-for-profit organizations.

Judy Murphy, CPA – St. Louis Partner-In-Charge Not-For-Profit Services Group 314.290.3496 judy.murphy@rubinbrown.com

Sharon Latimer, CPA – Kansas City Partner Not-For-Profit Services Group 913.499.4407 sharon.latimer@rubinbrown.com

Amy Altholz, CPA – St. Louis Vice Chair Not-For-Profit Services Group 314.290.3369 amy.altholz@rubinbrown.com

Evelyn Law, CPA – Denver Partner Not-For-Profit Services Group 303.952.1245 evelyn.law@rubinbrown.com

www.RubinBrown.com | page 15

CONSTRUCTION

The Slow Road to Recovery by Frank Hogg, CPA & Ken Van Bree, CPA

T he recovery of the construction industry continues to move along much slower than any of us would like. The good news is that positive sentiment within the industry seems to be increasing. Indicators, such as the American Institute of Architects Architecture Billings Index and FMI’s Nonresidential Construction Index have been increasingly bullish.

survey of the construction industry. The results reflected that 68% of participants felt positive about growth prospects as compared to only 18% a year ago. Of course, positive sentiment can only take us so far and then the realities of the marketplace take over. In our same industry survey, participants expressed increased frustration with the unwillingness of owners to make long-term investments. Most would agree that a sustained and broad-based non-residential construction market recovery has not occurred. While

RubinBrown Construction Survey Results The Construction Services Group of RubinBrown recently completed an annual

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Additional Areas of Concern Other concerns expressed in the survey included material prices, tight lending criteria, federal sequestration and overcapacity. The construction industry seems to be consistently hit by extreme volatility in material prices and there are fears that this volatility will increase during the remainder of 2013. In addition, it appears that the lending community remains tight in their lending criteria, which may be hampering growth. The construction industry will also be hurt by the decline in public construction and expectations of more cuts as federal sequestration continues. Many companies that focus on government work are feeling the effects of drained government capital budgets.

non-residential construction spending has certainly increased in 2013, overall spending levels are far from peak levels in 2008. Nonetheless, the increase in non-residential spending in 2013 is encouraging. Several economists are projecting increases in 2013 of 5% or even higher. Certain sectors are expected to do better than others. Segments forecasted to have higher growth include energy, transportation, health care, office and lodging. Shale oil exploration continues to be a bright spot and has been a tremendous boom to several regions. Improvements in residential construction continue to account for most of the growth within the construction industry. Although single family activity has been up and down, economists are seeing increased signs of sustainability with projected growth of 20% or higher in 2013. Multifamily construction was a definite bright spot for the industry in 2012 and is expected to remain very strong throughout 2013. has resulted in increased construction employment. There has been significant improvement in the unemployment rate for construction, although it varies widely by region. There have been reports of skilled labor shortages in several regions as the construction economy continues to improve. In RubinBrown’s construction industry survey, participants were very concerned about the shortage of skilled labor and the effect that it could have on future growth prospects within the industry. Construction Employment The growth in construction activity

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CONSTRUCTION

Jobs continue to be aggressively bid by some companies with little to no regard for margins. This certainly will not improve if companies that make their livelihood in government construction start looking towards the already crowded private sector.

Unfortunately, this is occurring at a time when overcapacity remains an issue within the construction industry. Although construction spending has picked up, activity is still far from peak levels and competition for work remains fierce.

RubinBrown’s Construction Services Group We provide services to general contractors, specialty subcontractors and related companies in the construction industry.

Frank Hogg, CPA – St. Louis Partner-In-Charge Construction Services Group 314.290.3413 frank.hogg@rubinbrown.com

Matt Beerbower, CPA – Denver Partner Construction Services Group 303.952.1252 matt.beerbower@rubinbrown.com

Ken Van Bree, CPA – St. Louis Vice Chair Construction Services Group 314.290.3429 ken.van.bree@rubinbrown.com

Scott Voss, CPA, CFP – Kansas City Partner Construction Services Group 913.499.4440 scott.voss@rubinbrown.com

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LIFE SCIENCES

Life Sciences Patent Issues and Funding Updates by Steve Hays, CPA

I n June 2013, the White House task force on high-tech patent issues issued an initiative designed to facilitate continued innovation and help ensure the continued development and delivery of high-quality patents in the U.S. The initiatives are a response to Patent Assertion Entities (PAEs) which are companies designed to assemble a portfolio of patents and then license them or litigate them. PAEs are also referred to as “patent trolls” because a good portion of these entities focus solely on litigating or threatening litigation against firms that may be utilizing a technology covered by a patent in the patent troll’s portfolio.

While PAEs can provide economically desirable outcomes (e.g., expanding markets for technology and facilitating technology transfer and diffusion through legitimate licensing activities), it is argued that patent trolls have a negative impact on innovation and research and development. The White House initiatives are designed to realign incentives and risks in order to spur and protect research and development efforts of innovative entities within the economy. The proposals are encompassed in seven recommendations for Congress to pursue through legislation and five actions implemented through the Executive Branch.

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LIFE SCIENCES

The legislative recommendations are:

Ensure ITC has Adequate Flexibility in Hiring This recommendation is intended to assist the ITC in hiring Administrative Law Judges, helping ensure that the proper resources are in place at the ITC.

Require Patentees & Applicants to Disclose ‘Real Party-In-Interest’ This recommendation was designed to increase transparency by requiring full disclosure of ownership by parties filing law suits and issuing patent infringement demand letters. Permit More Discretion in Awarding Fees to Prevailing Parties in Patent Cases With the intention to realign incentives by shifting more of the litigation risk to the filing party, this recommendation should reduce patent trolls’ abuse of the U.S. judicial system. Expand the U.S. Patent & Trademark Office’s (PTOs) Transitional Program This is an effort to create a higher standard for business method patents (business method patents cover a process rather than an item like a machine or component part). The intention is to reduce the prevalence of overly broad business method patents that make it easy for patent trolls to cast a wide net. This recommendation may lower the incentive for patent trolls to litigate and reduce the risk of litigation against innovative entities. Protect Off-the-Shelf Use by Consumers & Businesses The intention of this recommendation is to increase the protections from litigation of consumers and businesses that purchase a product “off-the-shelf” and use it strictly for its intended use. Change the U.S. International Trade Commission (ITC) Standard for Obtaining an Injunction This change is designed to increase consistency in the standards applied at the ITC and in district courts. Use Demand Letter Transparency to Help Curb Abusive Suits This recommendation is designed to increase transparency and disclosure in patent litigation by incentivizing filing of public demand letters to make them searchable by the public.

The five executive actions are:

Making “Real Party-In-Interest” the New Default The PTO will begin a process to require patent applicants and owners to regularly update ownership information when involved in proceedings before the PTO. This action is intended to increase the transparency of entities filing litigation and give defendants a clearer picture of the entities filing claims against them. Tightening Functional Claiming The action aims to have the PTO increase the scrutiny of patent applications and reviews with the goal of reducing the prevalence of overly broad claims within a patent. By limiting overly broad claims, the ability to file abusive litigation is also limited by reducing the size of a patent troll’s potential litigation market. Empowering Downstream Users The action enables the PTO to provide education and outreach materials to product end-users (who use legitimately purchased products for intended use) who face patent litigation. The action is intended to provide these end-users with the information necessary to challenge demands from patent trolls. Expanding Dedicated Outreach & Study The action continues existing outreach efforts to ensure that more progress is made in those areas critical to U.S. innovation. Strengthen Enforcement Process of Exclusion Orders The action starts an initiative to ensure that the processes for enforcing exclusion orders (regarding imported products) is transparent, effective, and efficient. The goal of these initiatives is to reduce economically harmful litigation initiated by patent trolls while maintaining the intellectual property protections critical to innovation.

page 20 | horizons Fall 2013

St. Louis Startup Funding by Stage

The measures are intended to increase transparency within the system and reduce the incentive to litigate. The desired outcome is a reduction in the risks and expenses facing innovators and an increase in the level of research and development activity. These issues are particularly relevant to IP intensive life science entities. In addition, the increasing utilization of technology and data analytics within the life science industries to facilitate research and development means that these patent issues will continue to be of high importance. RubinBrown’s Life Sciences Services Group will continue to update you as more information becomes available. Funding Update How does the St. Louis region compare in its funding for start-ups? According to data compiled by the St. Louis Regional Chamber used as part of the Regional Entrepreneurial Initiative, the sources for ‘pre-seed’ funding are improving as noted in the chart to the right. In Kansas City, the number of life sciences companies continues to grow at a steady rate. As noted in the Kansas City Business Journal, the challenge is to keep these early successful companies in the region.

Pre-Seed ($25K - $250K)

Seed ($250K - $1M)

Venture Capital ($1M+)

4

5 7 7

10 13 15

2006

2006

2006

11 20

2009

2009

2009

2012

2012

2012

Source: St. Louis Regional Chamber

Number of Kansas City Life Sciences Companies

Total life sciences companies in the region

Total life sciences companies that moved, closed or for which KCALSI had no information

199 206 240

21 19 16

2006

2006

2009

2009

2012

2012

Source: Kansas City Area Life Sciences Institute

RubinBrown Life Sciences Services Group RubinBrown provides specialized accounting, tax, and business advisory services to animal health, human health, renewable energy, and plant sciences companies around the country.

Steve Hays, CPA – St. Louis Partner-In-Charge Life Sciences Services Group 314.290.3336 steve.hays@rubinbrown.com

Todd Pleimann, CPA – Kansas City Managing Partner, Kansas City Office 913.499.4411 todd.pleimann@rubinbrown.com

Jason Mannello, CFA – St. Louis Vice Chair Life Sciences Services Group 314.290.3216 jason.mannello@rubinbrown.com

Rodney Rice, CPA – Denver Partner Life Sciences Services Group 303.952.1233 rodney.rice@rubinbrown.com

www.RubinBrown.com | page 21

REAL ESTATE

Accounting Changes Proposed for Affordable Housing Industry by Bryan Keller, CPA

P roposed changes in the accounting for investments in affordable housing tax credits would bring about not only clarity for investors, but potential major increases in investments in low income housing tax credits.

Raymond James of Tax Credit Funds, Inc. led the effort with support from a wide variety of industry stakeholders. The EITF voted to propose new guidance regarding when those investments will qualify for use of the effective yield method of accounting. Currently, investors have had to meet specific and strict requirements in order to use the effective yield method which limited the number of investments that qualified for its use. Accounting rules required all other

On March 14, 2013, the Financial Accounting Standards Board (FASB)

Emerging Issues Task Force (EITF) considered Accounting for Investments in Affordable Housing Tax Credits (Issue 13-B).

page 22 | horizons Fall 2013

tax benefits such as depreciation and operating losses.

investments to use the equity method of accounting.

3. The investor’s projected yield based solely on the cash flows from the tax credits and other tax benefits is positive. 4. The investor is a limited liability investor in the affordable housing project for both legal and tax purposes. Currently, an investor may elect to use the effective yield method for an affordable housing investment made through a limited partnership only if items (3) and (4) above apply and if the availability of the tax credits allocable to the investor is guaranteed by a creditworthy entity.

Differing Methods The presentation of an investment in affordable housing tax credits is significantly different under the two methods. Under the equity method, investment costs are presented “above the line”, on a pretax basis while the tax credits and other benefits derived from the investment are presented as a component of ”below the line”, income tax provision. The equity method accounting treatment has resulted in geography issues on the investor’s income statement thereby distorting investment performance. Under the effective yield method of accounting, investment costs are netted with the related tax credits and other benefits and presented as a single net tax benefit component of the income tax provision, all “below the line”. The effective yield method of accounting leads to a much cleaner and understandable financial statement presentation and one the industry is confident will make it easier to attract new investors. Proposed Amendments The amendments to current standards would allow investors investing in qualified affordable housing projects to utilize the effective yield method of accounting if: 1. It is probable that the tax credits allocable to the investor will be available. 2. The investor retains no operational influence over the investment other than protective rights, and substantially all of the projected benefits are from tax credits and other

www.RubinBrown.com | page 23

REAL ESTATE

Learn & Connect with the RubinBrown Real Estate Group RubinBrown Real Estate Blog

www.RubinBrownRealEstate.com

Follow RubinBrown Real Estate on Twitter @RubinBrownRE

RubinBrown Real Estate E-News www.RubinBrown.com/industries/real-estate

To view the 2013 Apartment Stats, go to www.RubinBrown.com

The EITF’s new proposed accounting guidance was exposed for public comment. The public comment period ended on June 17. There were 73 comment letters, none of which expressed opposition to moving all tax benefits to the same line as the tax credits – the primary objective.

Stay tuned as the EITF is expected to discuss this issue throughout the fall of 2013.

RubinBrown’s Real Estate Services Group RubinBrown has developed a strong reputation nationally as a leader in accounting and advisory services for real estate companies. Today, we provide specialized services to more than 2,000 real estate entities.

Bryan Keller, CPA Partner-In-Charge Real Estate Services Group 314.290.3341 bryan.keller@rubinbrown.com

Dave Herdlick, CPA Partner Real Estate Services Group 314.290.3383 dave.herdlick@rubinbrown.com

page 24 | horizons Fall 2013

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