Financial Reporting: What is Your Responsibility? Tina Kettle, United Technologies Corporation Doug Stewart, AircraftLogs Monday, Jan 16, 3:30 5:00
Agenda Session Objective Understanding the impact of data Getting the most out of your system Help to plan improvements Operational Reporting Impact of Data Types of Operational Reports Understanding Reporting Needs/Requirements Financial Reporting SEC Reporting IRS SIFL Income IRS Expense Disallowance Internal Accounting/Reporting ISBAO Time Share / Dry Lease / Wet Lease Establish a relationship with your Finance Dept. Explore your software Questions
Session Objectives Understand the impact of data on Operational Reporting Budgeting Cost Reporting Performance Metrics Identify critical data elements which support Financial Reporting IRS reporting for the company and the passengers SEC reporting for investors Be aware of specialized Internal Accounting your company may need to track: Time Share & Dry Leases IS-BAO Summary: Be prepared to help others in your company with reporting to support your flight department.
Operational Reporting Impact of Data Types of Operational Reports Understanding Needs & Requirements
Operational Reporting Impact of Data Aids Flight Department with budgeting and forecasting. Monitor monthly/yearly goals (metrics). Generated directly from data entered by Dispatch Office after a completed trip. Accuracy of data input is critical to producing error free reports. Reports reviewed by Senior Executives, Tax Department, Compensation Department and Flight Department personnel. When Flight Departments have a Financial Manager within their organization, that individual is generally the liaison between the Corporate Office and the Flight Department for all Financial and Operational Reports.
Types of Operational Reports - Monthly Flight Hour Reports Hour Plan by Aircraft Hours Flown by Authorizer International Hours Flown Budget Tracking Hour/Budget Comparison Monthly Budget Status (by cost center and by aircraft) Fuel Reports (dollars & gallons) Maintenance Dispatch Reliability Aircraft Availability Corporate Executives Flight Justifications Aircraft Chargebacks SIFL Calculations SEC Valuation
Operational Reporting -Tracking Flight Time
Operations Reporting - Trip Types
Operational Reporting - Passenger Coding
Operational Reporting - Chargebacks
Operational Reporting Understand Reporting Needs & Requirements Knowing what type of data to track for reporting is essential. Talk to your Finance/Tax departments to get a better understanding of what the company needs and requirements are. Work with your software provider to make capturing data easier for your department. There are usually ways to customize fields for inputting data required for specific reports.
Aviation Reporting Generates Significant Workload
Financial Reporting IRS SIFL Reporting for Passengers IRS Corporate Expense Disallowance SEC Annual Reporting to Investors
New Challenges Facing Corporate Flight Departments Flight Request & Approval Executives Exec. Assistants Maintenance Scheduling Flight Planning Flight Posting Management Reporting Greater Demand, More Corporate Users of Aviation Data Corporate Jet crackdown creates compliance challenges IRS & SEC Compliance More Challenging than FAA Compliance Corporate executives expect greater visibility and performance metrics Internal Processes have not evolved as Aviation Reporting requirements have increased New compliance requirements create complex business processes Incomplete data captured and stored Lack of accounting, reconciliation and close the books capabilities Scheduling systems are being stretched Compliance Reporting Internal Accounting Tax Accounting External Reporting Board of Directors Scheduling systems and process designed for airplanes and pilots; not to manage processes above System architecture restricts information sharing outside the flight department
IRS & SEC - Becoming Harder than the FAA? Primary Reporting Elements: 1. Aircraft Expense Disallowances (IRS) 2. SIFL / Fringe Benefits (IRS) 3. Proxy Reporting / Executive Compensation (SEC) 4. Related-Party Transactions (SEC) 5. Federal Excise Tax (IRS) 6. Internal Chargebacks 7. FAS109/FIN48 (GAAP) Compliance Requirements 1. ISBAO (IBAC) 2. Pilot & Crew Training & Experience (FAA) 3. Aircraft Maintenance Status (FAA) 4. Corporate Quality Processes U.S. Securities and Exchange Commission
SIFL Overview = SIFL is a GREAT DEAL Standard Industry Fare Level -- mileage rates & terminal charges Company-provided use of an aircraft is viewed as Compensation by the IRS Imputed Income = The IRS requires the value of this compensation be imputed to the employee s income. Generally, you can use one of two methods SIFL rates set by the IRS each year Charter Rate Method (market prices) Included in Your W-2 or 1099 Control Employees Imputed 10X Higher than Non-Control Employees! A round trip in a Gulfstream between Los Angeles and New York generates only $3,600 per pax in SIFL income to the executive; but if improperly calculated, the IRS could impose the charter rate method, skyrocketing taxable income to roughly $50,000 per trip.
Aircraft Expense Disallowance American Jobs Creation Act of 2004 ( AJCA ) requires companies to disallow the cost of personal entertainment flights provided to specified individuals. This calculation becomes a percentage of your aircraft use IRS Notice 2005-45 explained how to disallow and severely impacted the deductibility of corporate aircraft. Many companies still unaware and fail to disallow. Often its caused by a process breakdown Critical data never gets from the flight department to the reporting team or tax staff.
What Are We Disallowing? Preventing a portion of your overall aviation expenses from being deductible on the company tax return Could be millions - Makes the flight department look very expensive Four Methods of Calculation but each deal with occupied seats Before AJCA, only the business purpose of the flight mattered Now, the business purpose of every passenger matters Example: Chairman on business trip, family rides along for pleasure Before AJCA 100% deductible NO PROBLEM After AJCA spouse & two children 75% of flight is NON- DEDUCTIBLE Your Data Matters! Your Flight Patterns Matter! Example: $2 Million operating budget and $5 Million of depreciation Disallowing only 30% could cost the company $840,000 (40% of 30% of $7MM)
SEC Annual Reporting to Shareholders What s a Proxy Statement? Published annually for shareholder votes (same timing as annual reports) Many disclosures required about NEO s (Named Executive Officers) Must Disclose the Value of Aircraft Personal Use for each NEO If the value of personal use exceeds $10,000 it must be disclosed in the company s proxy statement If it exceeds $25,000, it gets its own footnote Value = Incremental Cost (there are no guidelines) Other Considerations SIFL is often disclosed for informational purposes, but cannot be used in lieu of incremental cost Time-sharing agreements, if in place, must be settled to avoid loans to officers Just one round-trip between Los Angeles and New York in a corporate can jet trigger SEC reporting requirements.
Sample SEC Disclosure: General Electric
Internal Accounting Departmental Chargebacks Time Share Agreements Executive-Owned Aircraft
Departmental Chargebacks General Description: Allocation of costs back to internal departments of a company, often designed to manage the use of the aircraft by those departments (or cost centers, divisions, etc.) More common in larger companies with widespread use of their aircraft Typically charged via an hourly rate; occasionally flight miles or other methods are used Common methods used for allocation, depending upon company accounting goals: Charge individual flights to department of the lead passenger Charge flights pro rata to the home departments of each passenger Charge flight department costs across all departments (whether they fly or not) as company overhead Benefit: May generate a more accurate view of which departments utilize business aviation, while also ensuring those departments recognize the cost.
Time Share Arrangements Under Part 91.501(c)(1), a time-sharing agreement allows an aircraft operator to be reimbursed for a limited set of costs for a flight. Corporate flight departments often provide time-sharing arrangements, allowing an executive to reimburse the company for personal use of the aircraft. These arrangements require specific tracking of ten eligible costs on each flight: 1. Fuel, oil, lubricants, and other additives. 2. Travel expenses of the crew 3. Hangar and tie-down costs away from home base) 4. Insurance for a specific flight 5. Landing fees, airport taxes, and similar assessments. 6. Flight-specific customs, foreign permits, and similar fees 7. In-flight food and beverages. 8. Passenger ground transportation. 9. Flight planning and weather contract services. 10. An additional charge equal to 100 percent of the expenses listed in item 1 (fuel) Time-sharing arrangement typically also trigger excise tax
Executive-Owned Aircraft Often, an executive may own an aircraft, and lease it back to his/her employer. This will create further internal accounting needs, depending on the nature of the arrangement: Dry leases Time shares Etc. For both Executive-Owned Aircraft and Time-Sharing Arrangements, the executives involved and the company will need to settle up periodically (who owes who). The data provided by the flight department will directly affect these calculations. Settlements will often occur quarterly, in order to be finalized for SEC reporting purposes (see next page for example)
More Williams Sonoma
Wrap Up & Q&A
Closing Comments Most companies have reporting needs which are directly impacted by the flight department The data you need is passing through your hands Capture it! Most companies use 30% of their software capabilities Tip: The NBAA Tax Class is Two Days Long Don t know who your tax people are? You may have trouble!
Use This Map to Find the People Who Need You!!
Questions? Doug.Stewart@AircraftLogs.com Tina.Kettle@UTC.com