The Governmental Accounting Standards Board (GASB) finalized the new Tax Abatement Disclosures, Statement No. 77 in August 2015; this statement requires governmental bodies to disclose information about (1) a reporting government’s own tax abatement agreements and (2) those that are entered into by other governments that reduce the reporting government’s tax revenues. Similarly, the Financial Accounting Standards Board (FASB) jumped into the fray in November 2015 (comments were due in February 2016, but no final statements had been released at the time of this article). The FASB wants to use this as a tool to increase transparency related to “government assistance arrangements” including “(1) the types of arrangements, (2) the accounting for government assistance, and (3) their effect on an entity’s financial statements.” Bottom line? Federal regulatory agencies are looking more closely at the tax credits and incentives state governments award to companies.
The Importance of a Review Process
Incentives review and compliance has always been a vital part of monetizing the incentives a company negotiated during the site selection process. With the additional burdens placed on governmental agencies and possibly on companies through a potential FASB standard, it is now more important than ever to establish an incentives review process for all incentives awarded.
An effective incentives review process seeks to:
- Review the company’s active incentives contracts;
- Track the company’s progress toward incentives contract requirements; and
- Monitor and comply with incentives contracts’ reporting requirements.
Furthermore, a company may need to decide which aspects of the review process, if any, can be automated and which parts of the review process will be completed manually. This determination may further dictate the frequency at which an incentives review is performed.
Some companies may invest in a software system to track the company’s progress toward incentives contract requirements and monitor upcoming incentives reporting deadlines, while others may collect and maintain all relevant incentives data in an excel spreadsheet. Companies should perform a cost/benefit analysis before investing in a software tracking system, taking into account monetary cost as well as the cost of staff time and training requirements.
Regardless of the system utilized for the incentives review process, it is also helpful to establish a formal review methodology to determine how the company will review its incentives, especially for companies with multiple incentives awards negotiated over a long period of time. For example, a company with incentives tied to many different locations may decide to review its incentives based on project location or real estate footprint, while a company with a smaller real estate footprint may decide to conduct its review based on incentive program or by incentives tied to the largest value to the company.
The Players in the Process
Once a company establishes the frequency at which it will perform an incentives review, which aspects of the process can be automated (if any), and a review methodology, the company is then ready to designate a project lead. The project lead will help identify individuals in various departments (stakeholders) who can obtain the data needed to track project progress and complete incentives reporting. Typical stakeholders of the incentives process may include, but are not limited to, human resources, real estate, legal, and the fixed asset team. For instance, human resources may be relied upon for headcount information and real estate for construction or build-out progress.
Additionally, the project lead may be a member of one of the stakeholder teams listed above or a member of a different department. It is imperative to identify each stakeholder and communicate each stakeholder’s role and responsibilities in order to demonstrate the overall impact of the incentives review process. The project lead will then establish a central calendar with the key milestones and timelines identified for each stakeholder. As mentioned above, incentives reporting deadlines are becoming more and more important, so it’s critical that project teams manage to those deadlines. Most incentives contracts will outline a company’s contractual obligation, which typically includes job creation and/or job maintenance requirements, capital investment requirements, average minimum wage, etc.
Establishing an incentives review process enables a company to identify project deficiencies well in advance of contract deadlines and decreases the risk of a company not being in compliance with incentives reporting requirements.
Since a company should continually be tracking progress of each incentive under an incentives review process, the project lead should be able to quickly determine if the company is not on target to meet its various incentives contract obligations. Most incentives contracts will outline a company’s contractual obligation, which typically includes job creation and/or job maintenance requirements, capital investment requirements, minimum average wage maintenance, etc. If the project lead determines that a project is not on track, the company should communicate any delays or other reasons for noncompliance to respective economic developers in advance of becoming noncompliant (typically at least 30 days in advance).
Furthermore, identifying these deficiencies enables the company to communicate potential project delays. In addition to timely identification of project deficiencies, an incentives review process will minimize a company’s risk of not being compliant with incentives reporting requirements. The repercussions of not filing timely or meeting minimum requirements may result in a variety of consequences. These can range from delayed payment timing for a minor oversight, to termination in the program for a moderate infraction, or, most severely, potential clawbacks being refunded with interest, penalties, and even attorney’s fees. In the worst case scenario, not only is there a monetary penalty with clawbacks but the potential negative press associated with a clawback can be a damaging to a company’s reputation, especially in today’s environment of public scrutiny.