Tag: Accounting

Digital Transformation: Building The Future of Construction

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By Ian Shapiro, Adam Rouse and Malcolm Cohron

The construction industry is due for a digital renovation. Faced with challenges around project efficiencies, ongoing safety concerns and flat-lining labor productivity levels, the industry’s sluggish adoption of new technologies has reached an inflection point. Digital transformation requires changing processes and using new resources that harness the power of data to improve communication, efficiency, productivity and safety. This can position construction firms for profitable growth in a highly competitive industry, while also addressing workforce challenges.

The construction industry has a workforce that skews older, and as more baby boomers head toward retirement, the industry faces a labor shortage that’s poised to get worse.  According to the U.S. Bureau of Labor Statistics, there were about 300,000 construction job vacancies in June 2019, and the industry is expected to need 747,000 more workers by 2026. While the demand for skilled craftspeople has continually increased, fewer young people are entering the industry.

Potential recruits just don’t see construction as an attractive and viable career option, especially when other sectors are considered more tech-savvy and offer perks that appeal to millennial workers. To navigate these conditions and sharpen their competitive edge, construction companies need to adopt a bifurcated strategy: invest in new technologies to streamline operations and lower costs from blueprint to final product, and invest in the workforce through retraining initiatives and by bolstering the talent pipeline.


Addressing Old Challenges with New Technology

Graphic of digital business, digital process and digital backbone

Transforming construction means more than introducing modern technologies to the industry: Technology correctly incorporated has the effect of rippling through and improving interrelated processes. This requires assessing the current state of a business, strategizing for the future state and then mapping a journey to that future.
 
Digital transformation goes far beyond digitizing analog functions; it enables a fundamental shift in how a business operates so that it can compete in a digital world. Three key areas of transformation are ultimately enabled by end-user adoption: Digital Business enables growth, Digital Process improves efficiency and profitability and Digital Backbone securely facilitates usability for business needs.

Identifying and adopting valuable digital tools, data-enabled hardware and field software can provide a solid foundation for sustained growth. For example, using drones or unmanned aerial vehicles (UAVs) for aerial photography can help expedite a land survey and assist planning through digital imaging techniques, precise topographic mapping software and data analytics that inform building strategy. Continued UAV surveillance can also help secure the site and inspect for safety hazards or structural issues. When applied in conjunction with 3-D printing, automated equipment tracking and progress reporting, these innovative building techniques reduce the time, effort and cost involved in more traditional construction approaches.

In an industry that has been challenged by disruptions to the price of materials—including tariffs of 25% on steel and 10% on aluminum imposed in 2018—increasing efficiencies and reducing controllable costs are more important than ever. Innovative software can identify and quantify work tasks, reducing or eliminating extraneous work to help maximize time and minimize effort. Supply chain information can even be tracked in the cloud, increasing transparency and accuracy by collecting that data within a single platform. Digital tools not only support the project budgets and timelines, but also promote worker safety and sentiment.


Navigating Workforce Woes

Workforce challenges in construction abound. The industry has been contending with a lack of organized site management, miscommunications between the field and regional office and a downward trend in employee morale.

The flow of information from job site to regional office to corporate can be fragmented, delayed and incomplete. The amount of time it can take to input information into the system leads to lack of real-time visibility into a project’s progress, which can ultimately have an impact on cashflow. Integrating data can streamline communication and deliver more accurate information more quickly. Work in Progress (WIP) tools track work in real-time, making sense of data that can then be used to inform subsequent project plans. They also allow for more accurately designed scheduling with the appropriate amount of margin and risk tolerance built into project plans. Similarly, Building Information Modeling (BIM) can synthesize all essential aspects of a project’s input into a single plan with 3-D modeling, wherein contributors can stay in timely communication.

Digital transformation can also help attract younger workers to the industry by creating more jobs that require tech skills. U.S. News & World Report noted in 2018 that less than 10% of construction workers are younger than 25, while the median age is above 42 years old. Modernizing processes through increased adoption of technology can both create new jobs and future-proof the industry.

Technology also enables construction managers to standardize approaches across a project (or multiple projects), facilitating additional clarity in delegating responsibility and even safety. The IDC predicts 279 million wearables will be in use by the end of 2023, a technology that can be applied to increase site safety and monitor for productivity. For instance, sensors attached to workers’ clothing or hard hats can track signs of fatigue to prevent an accident, monitor body temperature to avoid hypothermia or heat exhaustion, send an alert through noise or vibration to indicate a hazard and provide supervisors with real-time information about the number and location of employees on site. 

For companies who can augment their capabilities now, successful digital adoption may reinforce their competitive capabilities and lay the foundation for a successful future. From project management tools that offer real-time communication, updates and project overviews, to cloud and mobile technology, advanced uses for GPS, robotics, drones and more, innovative applications of technology can fundamentally change the project design and development process. Digital transformation can be the means for the industry to navigate workforce issues, discover new efficiencies and build an integrated platform to reinvigorate growth for generations to come.



This article originally appeared in BDO, USA, LLP's "BDO Knows Alert" newsletter (December 2019). Copyright © 2019 BDO USA, LLP. All rights reserved. www.bdo.com

What Companies Should Know about Final Section 263A Regulations

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What is Section 263A?

Section 263A, often referred to as the Uniform Capitalization rules or UNICAP, requires taxpayers to capitalize direct and indirect costs properly allocable to real or tangible personal property produced or acquired for resale by the taxpayer. For example, manufacturers, resellers and distributors of inventory generally must undertake an analysis every tax year to determine which costs must be capitalized, rather than currently expensed, under Section 263A. The costs that must be capitalized for tax purposes typically exceed the amounts capitalized for financial accounting purposes.  Accordingly, many taxpayers must capitalize “additional Section 263A” costs to property acquired or produced as an unfavorable temporary book/tax adjustment (i.e., an addback to taxable income).


What do the final Section 263A regulations address?

Taxpayers can use a variety of methods to identify and allocate additional Section 263A costs, including certain simplified methods for producers and resellers of inventory. Issued in November 2018, the final Section 263A regulations contain significant changes for taxpayers who are currently using the simplified methods by providing definitional guidance for Section 471 costs and adding a new method for certain taxpayers with average annual gross receipts exceeding $50 million. The regulations also address the treatment of so-called “negative Section 263A costs,” which arise when a particular expense is capitalized for book purposes but is not required to be capitalized for tax purposes (e.g., R&D costs or freight-out costs).
 

Who do the regulations impact?

Large producers of inventory (including taxpayers that utilize contract manufacturers) that are presently using the simplified production method will have to change their method if their average annual gross receipts exceed $50 million on an aggregated basis. If a large producer wishes to use a simplified method going forward, it must change to the new modified simplified production method. Otherwise, taxpayers also have the option to change to a facts and circumstances method, which is generally more time-consuming to implement and maintain.

Smaller producers with gross receipts under $50 million and resellers of any size may have to change their existing simplified method as well to adopt the new definitional guidance for Section 471 costs provided in the final regulations. Further, the regulations offer several simplifying de minimis tests that producers/resellers of inventory of all sizes should consider.
 

What should companies do?

Taxpayers subject to UNICAP should evaluate their existing methodologies and determine what changes are necessary in order to comply with the final regulations for tax years beginning after November 20, 2018. In general, implementing an accounting method change requires the preparation and filing of Form 3115, Application for Change in Accounting Method, and the computation of a Section 481(a) “catch-up” adjustment. As the preparation of the Form 3115 and the related Section 481(a) adjustment can require extensive analysis, taxpayers should take immediate action to begin assessing the impact of the new rules. To ensure adequate time to properly reflect the adjustment for both tax return and financial accounting purposes (if applicable), these conversations should begin, at the very latest, during the first few months of the 2019 taxable year.
 

How can we help?

We can review existing Section 263A calculations to identify what changes must be made to comply with the regulations.  In many instances, we may be able to identify additional opportunities or address exposures associated with historical calculations. We can also assist with the preparation, review and filing of the Form 3115 to ensure that all procedural considerations are appropriately addressed.

ASC 740 – FASB Issues ASU On Simplifying The Accounting For Income Taxes

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On December 18, 2019, the FASB issued Accounting Standards Update ASU 2019-12 on Simplifying the Accounting for Income Taxes. The decisions reflected in the ASU update specific areas of ASC 740, Income Taxes, to reduce complexity while maintaining or improving the usefulness of the information provided to users of financial statements.

Background: At its April 10, 2019, meeting, the FASB decided to add a project to its technical agenda to address simplifications to the accounting rules for income taxes under ASC 740. The project is part of the board’s overall Simplification Initiative. The objective of the Simplification Initiative is to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information required to be reported by an entity. A draft ASU was issued by the FASB in May 2019 with 24 comment letters provided by stakeholders at the end of June 2019.

Transition and Effective Date: For public business entities, the amendments in the ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.
 
Early adoption of the amendments is permitted, including adoption in any interim period for (1) public business entities for periods for which financial statements have not yet been issued and (2) all other entities for periods for which financial statements have not yet been made available for issuance. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period.
 
The amendments in ASU 2019-12 related to separate financial statements of legal entities that are not subject to tax should be applied on a retrospective basis for all periods presented.
 
The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption.
 
The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption.
 
All other amendments should be applied on a prospective basis.