We at MFA wish you all the best in the Holiday season, and we look forward to resuming our blog entries in 2009.

Happy Holidays!

The SEC voted yesterday to make XBRL the official standard for communicating business and financial information.  As XBRL Blog Magazine reports, the mandate comes out of a roundtable held by the SEC, and might require compliance for companies reporting as early as June 2009.

We noted over the summer in a post on XBRL that in a June survey by Compliance Week, 55% of 236 financial reporting executives had started researching XBRL or were not aware of the subject at all, and less than 20% of respondents had anybody on staff considered to be an XBRL expert.  This SEC mandate will demand a short learning curve for the first half of 2009; the transition might be challenging but the payoff will be considerable.  As we wrote in that earlier post, “Long-term benefits are likely to be realized by those businesses that are willing and able to embrace the technological change that XBRL will bring about, such as easier and faster access to competitive information and knowledge.”

The SEC’s study of mark-to-market accounting is winding down, and Compliance Week’s Tammy Whitehouse published some interesting insight into the initial comments made by SEC Chariman Christopher Cox.  The main thrust is that the fair value model is not at fault for the grave concerns of the markets, and that the standards need to be viewed as a constant amidst the carnage.

In answer to the call that went out for a rule change to ease the burden on companies that have been hit by a deterioration in value, Whitehouse offers a key observation and quote from Cox:

Cox defended the independence of the standard-setting process at the Financial Accounting Standards Board, where the accounting rules are written, imploring the future administration from excessive tinkering. Invoking lessons from the market collapse of the 1930s, the savings-and-loan crisis of the 1980s, and the corporate scandals of the 1990s and early 21st century, Cox said standard setting must remain free of self-serving influences. “It must also be protected from any regulatory reform in the new Congress and administration,” he said. “Accounting standards should not be viewed as a fiscal policy tool.”

A silver lining from the global financial debacle may be that standards are better understood and more widely respected.  Just Google “mark to market accounting” (here - I did it for you!) and witness the litany of results from the Fall of 2008 –  It’s clear that the concept has hit the mainstream.

As we head for the New Year, identifying goodwill impairment is fast becoming a crucial activity for year-end filers and, indeed, for public and private companies at all stages of reporting.

The recent economic avalanche has brought about a great many challenges, and we can add one more to the mix:  businesses that have made acquisitions in the last few years and are carrying significant amounts of intangibles and goodwill on their books may suddenly find that the fair value of their reporting units have declined significantly, resulting in a potential write-down.

While it may be difficult to swallow such a hit (which could occur despite strong sales and effective operations management), avoiding the issue can worsen the situation significantly.

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The Commonwealth of Massachusetts enacted a law in September protecting state citizens’ personal information. Originally scheduled for January 1, 2009,  the law will now take effect for all Massachusetts businesses and third party providers beginning May 1, 2009, with other requirements coming into effect January 1, 2010.

The law intends to protect employee personal information from unauthorized access and possible exploitation, and it extends to includes entities (not just individuals) of which companies often have ownership.

Personal information to be protected includes a person’s name and address, combined with complete social security number, driver’s license or other state-issued number, complete credit card or bank account numbers.

Companies that do keep this information will need to take some prescribed steps towards compliance.  They must:

1.  Establish written policies and procedures for the protection of these files, both in the electronic and physical formats.

2.  Be able to justify the need for all such information kept in house. Obviously employee data is needed to for tax, 401K, and insurance withholdings. But for client records is it possible to only maintain the last four digits of a credit card number?

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Despite the current economic environment, many companies still have healthy balance sheets and cash reserves to manage.  Corporate investment policies are something that come up from time to time among Board members, owners, firm partners, and financial departments of a wide range of companies.  But who’s really thinking about them?

It appears that not many professionals are.  At an event held by the Financial Management Association of NH on Monday, November 10th, less than a handful of financial professionals - out of a crowd of 100+ attendees - acknowledged implementing or being aware of any such policy within their organizations.  That so few of us were up to speed on the topic was a shocking realization to me.   Certainly the executives on hand are responsible leaders at the helms of successful organizations, therefore it stands to reason that such a fundamental step is more commonly deprioritized than it is taken to heart.  Here’s a primer on investment policies, courtesy of Morningstar.

Paul Miller of Axial Financial Group, who served on Monday’s panel along with Al Romero, SVP Business Banking at Bank of America and Matt Finn, VP Finance & Operations at Bradford Networks, highlighted two case studies that underscore the importance of using an investment policy.  One of the case studies  focused on a publicly-traded company that developed an investment policy stating that the “primary objective is preservation of capital and liquidity.”  This policy, which had been vetted by the management team and Board, was credited by that company’s CFO with helping them through the volatility of the past year and keeping them out of investment options such as auction rate securities.  Because of their policy, the company knew to immediately forego any goals of high yield in favor of keeping their cash in the safest vehicles available, and as a result were able to maintain the liquidity they needed.

An investment policy need not be overly complex, but I believe it is a fundamental building block for growing organizations, whether public or private.  And if the current economic climate does not convince us of that, perhaps nothing will!

As I sat late Tuesday evening on November 4^th watching the President Elect, Barack Obama, deliver his victory speech, a reality became apparent that the Bush administration is actually approaching its close and a new administration will be entering Washington.

It’s hard to believe that eight years have passed so quickly and also, as I reflect, that such an incredible number of historic tax law changes were enacted throughout Bush’s term. From tax rate cuts to Alternative Minimum Tax (AMT) relief to economic stimulus packages, the past eight years have been an extremely active time in taxation. As the country enters its next presidential term under new leadership, tax policy will undergo significant change.

One challenge for the new administration is the daunting task of balancing taxation with the government’s commitment to fiscal and social responsibility. If it reduces taxes, vital government programs face cuts, while an increase in taxes would result in a reduction of consumer and corporate spending, thus hampering the economy. President Elect Obama has addressed this dilemma by offering to reduce taxes to families making under $250,000 per year and subsidizing this reduction with increases to families making over $250,000 per year, a reduction of government spending and the elimination of abusive tax loopholes.

Under Mr. Obama’s plan, the following tax incentives are highlighted.

Middle Class Incentives (under $250,000/family)

- Tax credits of up to $1,000 for workers

- A $4,000 refundable credit for qualified tuition expenses

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After 5 successive years of delays, fiscal year 2009 will mostly likely be the year of reckoning for non-accelerated filers. Those companies with market caps at or below $75M are the last group of publicly traded companies that will need their controls attested to for the Sarbanes-Oxley Act. Many publications have waxed philosophically about the woes and the benefits of SOX, all of which can daunt the most confident executives of a small cap company.

Due to the projected costs,and the associated burdens of compliance, some companies retain the hope and belief that another delay or even more optimistic, a repeal of the Act will occur. Though we at MFA cannot profess to be an Oracle of the foibles of the legislative process, at the current time with the current market conditions, the likelihood of such a reprieve is not great. That being said, management’s attestation of the design and effectiveness of their internal control environments will be evaluated by the external auditors.

It may appear that our prognosis is self-serving, so in the interest of transparency, here are two points that outline why we think the deadline will stay.

1.  We hypothesize that after the recent collapse of the credit market, it is reasonable to conclude that politicians will not be receptive to lessening business regulations in the near future.

2.  Accounting Standard 5 (AS5), released by the PCAOB in June 2007, has scoped the compliance effort and added substantial clarity on being compliant. Specifically, the Standard provides details on how all public companies can insist their external auditors place more reliance on a top-down risk assessment, which is to identify what truly is a risk to the enterprise in question. In place of a blanket and all encompassing risk-averse assessment as dictated in AS2, greater credibility can be placed on the work a public company and its internal auditors have completed identifying and demonstrating operating controls. In fact, the PCAOB has further extended clarification that external SOX audits are not to be started from scratch, and are not to be “one-sized” for all.

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At this point, everyone has heard of the new Emergency Economic Stabilization Act of 2008 (EESA), more commonly known as the “Bailout Plan.” This plan authorized the US government to spend up to $700B to rescue US financial institutions from the lingering effects of the sub-prime mess (to put it lightly). But the Bailout reached further than the banks and brokerage houses:  deeply rooted within the plan are tax provisions that will affect a large number of taxpayers.

One such provision is Alternative Minimum Tax (AMT) relief, which increases the exemption amounts to $69,950 for married filing jointly, and $46,200 for individuals (pre-EESA, the amounts were $45,000 and $33,750, respectively). The provision will also allow for personal credits against AMT. The cost of this provision is estimated at approximately $62B over ten years.

Also included are extensions expiring after December 31, 2007. For individual income tax some of the popular incentives include:

1.  the deduction for state and local sales taxes for those who elect to deduct sales tax in lieu of the state income tax deduction,

2.  deduction for qualified tuition expenses for higher education (subject to adjusted gross income limitations,

3.  teacher’s education expense deduction of $250,

4.  additional standard deduction for real property taxes for nonitemizers, and

5.  tax free contributions of IRA plans to qualified charitable organizations.

Extensions for some of the popular business tax incentives include:

1.  extension of the Research and Development Credit,

2.  15 year straight line depreciation for qualified leasehold, restaurant and retail improvements,

3.  section 199 deduction for Domestic Production Activity in Puerto Rico, and

4.  extension of Work Opportunity Tax Credits for Hurricane Katrina Employees.

The Bailout  also includes a number of renewable energy incentives enacted to encourage investment in this area, as well as  some revenue generating provisions. One provision that will affect many taxpayers is the new mandatory requirement for brokers to furnish basis information to the IRS relating to sales of publicly traded stock. In prior years, brokers were only required to report gross proceeds and it was up to the taxpayer to report the appropriate cost basis. It will be extremely important that taxpayers confirm that their broker has the correct basis on their portfolio, especially if funds were transferred to a new broker. This provision is expected to raise close to $6.7B in revenue over the next 10 years.

There is no question that the bailout, from a macro level, will ultimately cost Americans as Wall Street is slated for the bulk of the economic attention. Some studies have estimated the cost at around $5,000 per working American. However, the tax incentives included within the plan allow some relief for taxpayers and businesses.

Is the bailout plan perfect? This will likely be debated for some time, but one thing that is for certain is that the tax incentives were a necessary addition to the overall plan.

We have said before that despite the difficult market environment, “hunkering down” may invite even more trouble.  While prudence is a virtue, we always believe - in good times or bad - that efficient use of cash and resources is imperative to a successful business.  This is a time to be aggressive, not passive, in establishing a position of strength.

However, it must be acknowledged that there will be some adjustment to the times, and one area that companies can address is collections. Before considering cuts that could stall your company’s momentum, be certain that you are collecting on the profits you have already earned.

Here are a few tips on collections from Charlie Colarullo of Transworld Systems, a profit recovery agency:

1.  Regularly review all customer accounts and send written demands for accounts that are less than 6 months overdue. If you work with a collection agency, submit past due accounts on a consistent basis to ensure the recovery effort is always in motion.

2.  If you use an agency, become familiar with all the reporting tools that are available online and regularly view them to keep up to date on the performance of your account.

3.  Use verbal demands for accounts 6 months overdue and beyond.

4.  Don’t accept “payment arrangements” on accounts that are in the verbal demands stage. The debtor has already ignored your efforts to collect and written demands, therefore accepting payment arrangements now could only further delay the collection of the debt owed to you.

While it shouldn’t need to be said, please remember to take care of your business by remaining proactive on issues such as collections, business development, marketing and innovation.

Forward thinking activities are the differentiators in an otherwise difficult economy, and will set the stage now for future wealth creation and success.  Staying active in these areas will prevent stagnation, because once a business is stalled, it can be difficult to climb back into motion, regardless of market conditions.