- Hello and welcome.
My name is Roger Phillipp of Roger CPA Review.
Today I wanna talk about the top two changes
to the CPA Exam in 2019.
We've been working hard to ensure
that our 2019 course materials
reflect the updates to the CPA Exam
provided to us by the AICPA.
While there are no structural changes on the exam,
there are major content changes happening
on the FAR and REG exams
that are going into effect January 1, 2019.
In Financial Accounting and Reporting, or in FAR,
the big area that changed is leases.
In 2016 the FASB issued ASC 842
which updated the accounting treatment of leases.
The goal was to provide more transparency and comparability
among companies regarding lease assets and liabilities.
To help ensure the transition,
the Board allowed entities to adopt
both the new lease standard,
and it wasn't gonna hit the exam
or isn't until January 2019,
which is now quickly approaching.
Some of the changes include balance sheet recognition.
Operating leases lasting over 12 months
now must be reported on the balance sheet.
So before we had what we called off-balance sheet risk,
now they have to be listed in the balance sheet.
The new standard creates transparency for investors
regarding a company's financial leverage and earnings.
With financial statement disclosures,
ASC 842 has much more stringent disclosures requirements
for both quantitative and qualitative
financial statement disclosures.
The increased requirements may require companies
to improve or implement new systems, procedures,
and controls to provide the required disclosure.
Lease qualification.
Long-term leases are now reported on the balance sheet.
Short-term leases of 12 months or less are sill allowed
to be excluded from the balance sheet,
but you could include them if you so desire.
The new standard dictates that if the lessee does not
have the right to control the use of the asset,
then the transaction may not qualify as a lease.
So that deals with (singing) control.
So you've gotta have the control.
With lease payments there is a new revised definition of
indirect costs resulting in fewer allowed capitalized costs.
Executory costs like property taxes and insurance
will now be included in lease payments.
Regarding a sale leaseback transaction,
so you sell it, and the you immediately lease it back.
To qualify as a sale,
the transfer or the asset must adhere
to the revenue recognition requirements in ASC 606,
which deals with revenue from customers with contracts.
When the transaction does not qualify as a sale,
it is classified as a financing transaction,
so kind of like you borrowed the money
and more of what we call a note payable.
So what does all of this mean for you?
Well since several bright-line tests have been removed,
the update also requires that more judgment be applied.
Because we used to have these four criteria
for a capital lease, now we call it a finance lease,
now there's five criteria.
Things like specialized nature,
a purchase option, title transfer,
but here's an area where it kind of got a little gray.
The term it says it has to be a major part of the lease,
used to say 75% payment,
substantially all, which used to be 90%
of the fair market value.
So that's where the bright-line test kind of come in.
So what you're gonna see is you're gonna need
more of what we call brain power
when addressing these questions on the CPA Exam,
once these changes go into effect on January 1, 2019.
Now let's talk a little bit about regulation changes,
especially in the area of taxation.
This is probably the biggest change,
that everyone is talking about,
to the CPA Exam, especially in regulation.
And this is due to what we call the TCJA,
which is the Tax Cuts Jobs Act of 2017.
This significantly changed and updated the tax code,
which impacts all the sections of tax,
which accounts for most as up to 85% of the regulation exam.
This is the section we highly recommend
that you take this year in 2018,
as it will require to relearn
all that great stuff that you studied in school about taxes,
whether it was in university,
or whether you've been working in real world,
it'll all change.
Here are some,
just a few, of the examples of the changes.
There's an increase in the Section 179 deductions,
so we talk about deductions for depreciation
and bonus depreciation,
used to be about half a million,
now it went up to $1 million,
starts to phase out at $2.5 million.
Increase standard deduction,
but the elimination of the personal exemption.
So no more personal exemption,
dependency exemptions,
but your standard deduction is $12 thousand,
married filing joint double,
or $24 thousand might be a good reason to get married.
New limitations on property and state taxes,
as well as local taxes and also mortgage interest.
So your property and state tax and all those
are limited to $10 thousand max,
your mortgage interest used to be $1.1 million,
they dropped it down to $750 thousand.
There's also a new deduction of up to 20%
for owners of certain pass-through entities
like S Corps, partnerships and so on.
It's called the QBI deduction,
or a Qualified Business Income deduction
which is really nice.
We increased the charitable contributions,
so if you donate cash,
you could have instead of 50% of A-G-I,
they increased it to 60% of A-G-I.
Entertainment expenses are now disallowed.
So we used to do meals and entertainment,
now it's just meals,
no more entertainment.
The new corporate tax rate, flat tax rate,
it went from 35% down to 21% which is helpful.
And that whole purpose was to bring
corporations back into the United States.
Increased gross receipts test,
which allows more entities now to use the cash basis,
or cash method of accounting,
used to be at $10 million,
they increased it to $25 million.
So in conclusion
you can see that the CPA Exam content updates
to these two areas will be significant.
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