Avoid Year-End Surprises
December 2009, Auto Dealer Today - WebXclusive
Talk With Your Accountant Now
As we all know, 2009 is a year we are willing to lock away in the attic and forget. There have been many changes in management styles, efficiencies, inventory values, personnel, sales, income, et cetera this year, and there will probably be more to come in 2010.
One of the biggest problems some dealers are facing is the lack of inventory and the factory’s inability to provide new stock to replace the vehicles sold during the Cash for Clunkers program. Manufacturers that can’t supply adequate replacement inventory, and dealers, will lose sales.
Not only will they lose sales, but if they are on the LIFO method of valuing inventory, their biggest problem may be lower-than-normal new vehicle inventory values at year-end. If this is the case for you, you may have substantial LIFO income to record at year-end. Now wouldn’t that be a welcome thing to hear in probably the worst year in your dealership history? You may have low profits or losses year–to–date, but from what we have tentatively calculated for some of our dealers, the LIFO income recapture will more than offset the losses they have. You will owe taxes in a year you really have not made any money and don’t have any money to pay the taxes due on the LIFO recapture.
If you haven’t addressed this issue yet, you should contact your tax advisor as soon as possible to discuss alternatives. Your tax advisor should calculate what your potential LIFO income recapture will be based on projected inventory levels you expect to have at year-end. This doesn’t mean you should try to buy as many cars as you can to replace the inventory value you need. Even though you may record additional income, it may not make economic sense to stock vehicles you have trouble selling in your area.
Other surprises you may encounter are the bank’s requirements for providing CPA-issued financial statements at year-end. If you have been providing just tax returns to your banks and finance companies, the additional cost and time of your employees providing the information needed to generate CPA-issued financial statements can sometimes be overwhelming. This is especially true if an audit is required by the bank for the first time.
Audits are the most detailed and comprehensive CPA financial statement issued. They require the auditor to perform many tests of transactions and balances, receive confirmations, observe your vehicle and parts inventory, prepare detailed footnotes disclosing everything about your business, review internal controls and your computer software, etc. The amount of work required and the time involved normally overwhelms most office managers and controllers who already have enough to do without auditors asking them for additional documents, asking questions about accounts they never worried about, etc.
There are not too many ways around this except to be organized, have the accounting records up to date and timely prepared, and have detailed support for most of the balance sheet accounts and some income statement accounts. You should have the amount of intercompany transactions and outstanding balances recapped and what accounts the activity is in. You should make sure all intercompany accounts agree and reconcile to each other.
One way to speed up the process and decrease the amount of time needed to complete the audit after year-end is to complete some of the fieldwork before year-end. Most testing and other procedures can be completed in advance to decrease the amount of time spent after year-end. Most financial statements are required to be in the bank’s hand by March 31 or April 30 for December year-ends, so it is critical to have as much of the preliminary fieldwork as possible completed before year-end. This year, it has been harder to get the banks to issue loan covenant waivers for violations of your loan agreements. You should review your loan covenants monthly to ensure you are still compliant with the terms of the loan.
Other types of CPA-issued financial statements, such as compilations and reviews, do not require the level of procedures an audit does. However, if there are disclosures in the footnotes required by the bank, there may be some initial-year problems gathering this information for the first time, as your accounting records may not be set up to provide this information very easily.
If you need CPA-issued financial statements for the 2009 year-end and it is the first year to do so, contact your CPA early to find out what information they will need in addition to what you have always provided them. They should be able to provide you a list. That doesn’t mean they will not ask for any other information. Oftentimes, documents generate additional questions and requests for even more documents to complete our procedures.
You should review your adjusting entries, which were made at the prior year-end and see if you will need to record the same type of entries this year-end. If so, you should record them before the year-end is completed. This will save you time and money later on. Make sure your current retained earnings account matches page four of the federal income tax return from the prior year-end.
Your year-end is really just another month-end. You should be reviewing your accounts monthly and reconciling them monthly. Failure to do so will normally result in large year-end adjustments (i.e., surprises). It is difficult to estimate year-end taxes due when the financial records are not accurate and up to date. One of the largest and most disturbing things we see at year-end is the lack of bank account reconciliations for each month-end. These are necessary if you want to have any confidence in your financial status each month-end and year-end.
Talk with your accountant now and find out what you need to do to properly prepare for year-end in a timely and efficient manner. Failure to do so will result in excess work to be performed after year-end and delays in finishing the tax returns or preparation of the CPA-issued financial statements.
Vol. 6, Issue 11