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News for Corporate Professionals from Checkpoint Learning
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July 2016
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ROIC: Tax and Accounting New Hot Topic

ROIC: Tax and Accounting New Hot Topic Tricia Genova and Robert Goulding, CFA discuss the increased popularity of ROIC in the financial accounting and investment communities.

Return on Invested Capital (ROIC) is a financial profitability ratio that measures how efficiently a company generates cash flow from the capital that is invested in it. The formula divides an estimated measure of cash flow – typically Net Operating Profit After Tax (NOPAT) – by a company’s equity and debt minus its cash; a measure of how much capital stock has been invested. The ROIC metric has become an important calculation for a variety of users, including accounting and tax professionals as well as investors.

Accounting and tax professionals need to understand the increasing popularity of the ROIC metric. For example, accountants will find the calculation useful since their clients will want to assess how their respective ROIC ratios compare to those of industry peers. Tax professionals should appreciate the mathematics behind the ROIC calculation since it is a financial measure that reflects tax planning results.

From the perspective of an investor, the higher the ROIC – the better a company is at increasing its operating profits for every dollar that is invested in it. If investors do not earn the realized return they had expected, they will seek to sell the asset.

Analyzing ROIC

ROIC is a popular financial metric utilized for evaluating companies in various industries.

The following companies, taken from a sampling on, are above median relative to industry peers when observing ROIC rates:

Ticker ROIC WACC Difference
UAL 56.25% 8.0% 48.25%
EAT 29.50% 3.6% 25.90%
HCA 19.04% 3.75% 15.29%

WACC (Weighted Average Cost of Capital): Calculates the presumed rate to be paid to all security holders for financing assets. For example, if ROIC is greater than WACC, the difference in percentage indicates that the company is generating more in profits than it costs to continue business operations.

United Continental Holdings (UAL) is a leading airline company in the U.S. Their ROIC rate of 56.25% shows that, based on the cost of capital, UAL is very efficient at earning operating income from invested dollars.

Furthermore, Brinker International (EAT), which owns Chili’s and Manggiano’s Little Italy restaurant chains, has a ROIC of 29.50%, which is high for the restaurant industry.

Finally, HCA Holdings (HCA), a leading hospital chain operator, has a ROIC of 19.04%. While this percentage is certainly lower than those of both UAL and EAT, this ROIC rate is still very high for the industry.

In analyzing the above examples, it is clear that different industries call for differing levels of financing. For example, an airline company having a higher WACC than a restaurant chain shows that investors require a higher rate of return on invested capital for the airline industry than they do for the restaurant industry. This is due to the fact that airline companies invest capital much more intensively than companies in other industries that use fewer capital assets. If a company’s cost of capital is higher, the return will be higher from every invested dollar that is expected, leading to a higher expectation for wealth creation.

When a company has a high ROIC rate, this does not necessarily mean that it is better managed than one with a lower rate. However, a company that shows a steadily increasing rate of ROIC over time indicates a positive trend for business performance.


ROIC is becoming an important metric when looking at a company’s ability to turnover an invested dollar directly from core business operations. Business advisors that recognize the merits of this will be able to better serve their clients. Similarly, investors that pay attention to ROIC will have a better understanding of a company’s profitability and wealth creation ability. Even if a particular company currently has a low ROIC, a positively up-trending ROIC is a favorable sign. As more companies use the ROIC metric, the advisory community needs to understand the essence of the calculation.
New Overtime Rules

New Overtime Rules In May 2016, the Department of Labor (DOL) published its Final Rule updating the overtime regulations. The Final Rule defines which white collar workers are protected by the minimum wage nad overtime standards of the Fair Labor Standards Act.

A basic tenet of working in the United States is that a fair day’s work deserves a fair day’s pay.

The Fair Labor Standards Act (FLSA) is the federal labor law that provides basic workplace protections to most workers in the U.S., and guarantees them at least the federal minimum wage for every hour they work, and overtime is paid at one and a half times their regular rates of pay for hours worked beyond 40 in a single workweek.

The Department of Labor has estimated that 4.2 million salaried workers will be affected by the Final Rule, in the first year. The changes in this law will hit many businesses, but not all employees are affected. For example, the following employees are not affected by the new Final Rule:
  • Hourly workers
  • Workers with regular workweeks of 40 or fewer hours
  • Workers who fail the duties test
  • Most highly compensated workers
  • Workers who do not engage in interstate commerce
  • Workers in states where state laws have higher minimum wage and overtime protections
The Department of Labor uses a variety of remedies to enforce compliance with the FLSA's requirements. When Wage and Hour Division investigators encounter violations, they recommend changes in employment practices to bring the employer into compliance, and they request the payment of any back wages due to employees.

Willful violators may be prosecuted criminally and fined up to $10,000. A second conviction may result in imprisonment. Employers who willfully or repeatedly violate the minimum wage or overtime pay requirements are subject to civil money penalties of up to $1,100 per violation.

In this Final Rule, the Department of Labor (DOL) updates the regulations for determining whether white collar salaried employees are exempt from the Fair Labor Standards Act's minimum wage and overtime pay protections.

Since salaried employees are paid a fixed rate, not paid by the hour, their “pay rate” diminishes the more hours they work. For example, Sara, a salaried employee, is paid $456 a week. Her hourly rate would be $11.57 an hour, based on a 40-hour week. This hourly rate is more than the current federal minimum pay wage for non-exempt employees. Suppose her employer schedules her to work a 64-hour workweek. Her hourly rate would fall to $7.12 per hour, which is below the current federal minimum pay wage of $7.25.

The exemptions provided by FLSA Section 13(a)(1) apply only to “white collar” employees who meet the salary and duties tests set forth in the Part 541 regulations. The exemptions do not apply to manual laborers or other “blue collar” workers who perform work involving repetitive operations with their hands, physical skill, and energy.

The Salary Basis Test: The employee must be salaried, meaning that they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.

The Salary Level Test: Under this Final Rule, the employee must be paid more than a specified weekly salary level, which is $913 per week (the equivalent of $47,476 annually for a full-year worker) under this Final Rule.

The Duties Test: The employee primarily performs executive, administrative, or professional duties, as defined in the Department's regulations.

FLSA-covered, non-management employees in production, maintenance, construction, and similar occupations are entitled to minimum wage and overtime premium pay under the FLSA, and are not exempt under the Part 541 regulations.

For more information and continuing education credit, see the Checkpoint Learning course at: Effects of the New Overtime Rules
U.S. & Global Companies up the Ante on Sustainability

U.S. & Global Companies up the Ante on Sustainability Charles R. Goulding and Michael Wilshere discuss the increasing trend toward sustainability by U.S. Corporations

In the United States and around the world, sustainability is increasingly becoming a focal point of corporate strategy. Not only is it beneficial for the environment, but it is also consistent with long-term financial success and profitability. Sustainability not only optimizes the use of resources but it minimizes operating costs, reduces tax liability, enhances brand equity, and attracts investment as well.

Successful corporations recognize the benefit. Numerous reports by lead consulting and accounting firms report that sustainability is becoming an increasingly core consideration for successful businesses around the world. The United Nations takes a similar position in its 2015 Guide to Corporate Sustainability

The trend is no different within the United States. In 2015, 75% of companies listed on the S&P 500 produced sustainability reports in response to growing stakeholder and stockholder demand for them. According to the Governance & Accountability Institute, only 20% of all S&P 500 companies produced similar reports in 2011. This increase in sustainability reporting suggests a growing importance being placed on sustainability within corporate strategies. The chart below demonstrates the increasing trend for reporting on sustainability within the S&P 500.

Chart showing trends of S&P 500 sustainability reporting over the last 4 years.

Investor concern for sustainability may, to some degree, explain the cause for the trend. According to a recent survey from US SIF: The Forum for Sustainable and Responsible Investment (a leading voice advancing sustainable, responsible, and impact investing across all asset classes), one out of six dollars under professional management is currently earmarked as sustainable. This is up from one out of nine dollars in 2012. These investors not only see the environmental benefits of sustainable investing, but its positive effect on return on investment (ROI) as well.

There are numerous ways in which sustainability can help a company’s bottom line. Energy efficient lighting and high efficiency heating and cooling equipment can significantly reduce energy costs. Also, sustainable supply chains can reduce transportation costs for products and materials. Additionally, sustainable process improvements can reduce manufacturing costs. Finally, sustainable designs can often reduce first costs for new buildings and equipment.

The availability of utility rebates and government incentives can further increase sustainability benefits. The primary incentives include utility rebates for energy efficient equipment, EPAct (Energy Policy Act) tax credits, and alternative solar tax credits. In many areas, these incentives can reduce the upfront costs for energy efficient and renewable energy solutions by over 50%.

Perhaps the most substantial government energy incentive is The Energy Policy Act of 2005. The bill was passed by the United States Congress on July 29, 2005, and signed into law by President George W. Bush on August 8, 2005. Known for its widespread success in enhancing sustainability on a national scale since that time, the bill contains numerous provisions aimed at sustainability. Some of the broader measures incorporated in the bill are described below:
  • Authorizes tax credits for wind and other alternative energy producers
  • Authorizes loan guarantees for innovative technologies that avoid greenhouse gases
  • Requires the Department of Energy to conduct numerous studies on sustainability
  • Provides tax incentives for those making energy conservation improvements to buildings & facilities
  • Authorizes loan guarantees of up to 80% of project costs for energy efficiency
U.S. companies focused on sustainability should take particular notice to Section 179D which can be utilized by building owners in any industry. Section 179D tax incentives provide up to $1.80 per square for qualifying lighting, HVAC, and building envelope projects. At the end of the 2015 tax year, President Obama signed the extension of Section 179D, the Energy Efficient Commercial Building Deduction. Section 179D was extended for two years; one year retroactive (2015) and one year forward (2016).

Both existing buildings and new buildings are eligible for the EPAct tax incentive. Although virtually all building categories are tax incentive eligible the benefits are particularly favorable for warehouses and manufacturing buildings. To qualify, a building, post project, must reduce its energy costs as compared to an ASHRAE building energy code standard.

With the two year extension of Section 179D, energy efficient tax incentives have now been available for 11 years. Most existing buildings that are 11 years or older have had some type of upgrade (lighting, HVAC, or building envelope) that likely qualifies for EPAct tax incentives.

The Energy Policy Act of 2005 was the most comprehensive energy policy act ever enacted by Congress. As U.S. companies are increasingly focusing on sustainability, most of them will be able to take advantage of some of the many incentives offered by the act.
Protecting Americans from Tax Hikes Act of 2015 (PATH Act)

Protecting Americans from Tax Hikes Act of 2015 (PATH Act) The Protecting Americans From Tax Hikes Act of 2015 (PATH Act), Public Law 114-113, was signed into law on December 18, 2015. The Act's provisions impact virtually all classes of taxpayers: individuals, businesses, and not-for-profit organizations. Title I of the act addresses tax extenders whereas the Title II includes program integrity provisions in an attempt to reduce fraudulent tax filing.

A few of the tax provisions extended permanently include the following.

IRC Section 24: Earnings Threshold for Additional Child Tax Credit

An individual may claim a tax credit of $1,000 for each qualifying child under the age of 17. The otherwise allowable aggregate child tax credit amount is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income (“modified AGI”) over $75,000 for single individuals or heads of households, $110,000 for married individuals filing joint returns, and $55,000 for married individuals filing separate returns.

To the extent the child tax credit exceeds the taxpayer's tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit) equal to 15 percent of earned income in excess of $3,000 (the “earned income” formula).

Families with three or more qualifying children may determine the additional child tax credit using an “alternative formula” if that results in a larger credit than determined under the earned income formula. Under the alternative formula, the additional child tax credit equals the amount by which the taxpayer's social security taxes exceed the taxpayer's earned income tax credit (“EITC”).

IRC Section 25A: American Opportunity Tax Credit

Formerly known as the “Hope credit,” the American Opportunity tax credit is $2,500 per eligible student per year for qualified tuition and related expenses paid for each of the first four years of the student's post-secondary education in a degree or certificate program. The modified credit rate is 100 percent on the first $2,000 of qualified tuition and related expenses, and 25 percent on the next $2,000 of qualified tuition and related expenses.

The credit that a taxpayer may otherwise claim is phased out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for married taxpayers filing a joint return). The credit may be claimed against a taxpayer's alternative minimum tax (AMT) liability.

IRC Section 32: Earned Income Tax Credit

The PATH Act of 2015 extends the four separate credit schedules: one schedule for taxpayers with no qualifying children, one schedule for taxpayers with one qualifying child, one schedule for taxpayers with two qualifying children, and one schedule for taxpayers with three or more qualifying children. It also extends the credit at 45 percent for taxpayers with three or more qualifying children and continues the phase-out provisions and inflation adjustments as most recently modified in the American Taxpayer Relief Act of 2012.

IRC Sec. 164: Deduction for State and Local Sales Taxes

At the election of the taxpayer, an itemized deduction may be taken for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes. No deduction for either State and local income taxes or State and local general sales taxes is permitted for purposes of determining a taxpayer's alternative minimum taxable income.

Taxpayers have two options with respect to determining their sales tax deduction amount. They may determine the total amount of general State and local sales taxes paid by accumulating receipts showing general sales taxes paid, or use tables created by the IRS that state allowable deductions based on income and residence.

For more information on the PATH Act and continuing education credit see the Checkpoint Learning course on this topic: Overview of the PATH Act of 2015
Why U.S. Accountants & Tax Advisors Need to Focus on China

Why U.S. Accountants & Tax Advisors Need to Focus on China Charles Goulding & J. David Roberson Discuss China's Rapidly Expanding Investment in U.S. Business & Education

Corporate Investment

China recently became the world's second largest economy and has also emerged as the world's largest exporter. Chinese investments in U.S. businesses, all but non-existent fifteen (15) years ago, now total nearly $50 billion and could reach $200 billion by the end of the decade. Chinese investors have bought or created 1,583 U.S. companies through December 2015 that now employ 80,600 full time workers, a fivefold increase in the last five (5) years.

The Committee on Foreign Investment in the U.S. (CFIUS) shows China in the top spot for the third year in a row. China's rise to the top of the CFIUS ranking results primarily from the increase in the number of Chinese acquisitions from an average of 13 in 2006-2009 to 43 in 2010-2013, doubling to 100 in 2014 and 103 in 2015. The greater prominence of Chinese transactions demonstrates the sharp uptick in Chinese deal making activity in the U.S. and a shift of that interest towards technology.

Another factor contributing to the growth in Chinese deals is the shift in size and industry target composition. Previously driven by a few large scale energy deals, Chinese foreign direct investment in the U.S. has become more diverse and now targets U.S. tech assets, including personal computers and semi-conductors. While CFIUS remains an important regulatory hurdle that Chinese investors have to clear for U.S. acquisitions, the vast majority, even with increased volumes, pass reviews without any problems. This is illustrated by the sky rocketing number of successfully completed deals across a wide spectrum of industries. The following chart shows the most notable recent acquisitions made by Chinese companies in 2015-2016:

Syngenta   ChemChina   $ 43,000,000,000.00
Starwood Hotels   Anbang Insurance   $ 15,188,000,000.00
Smithfield Foods   Henan Shineway   $ 7,276,000,000.00
Ingram Micro   Tianjin Tianhai   $ 7,247,000,000.00
GE Appliances   Qingdao Haier   $ 5,400,000,000.00
Terex   Zoomlion Heavy Industry   $ 5,122,000,000.00
Legend Pictures   Dalian Wanda   $ 3,500,000,000.00
AMC Entertainment   Dalian Wanda   $ 2,909,000,000.00
Fairchild Semi-conductor   China Resources Holding Co.   $ 2,659,000,000.00
Devon Energy   Sinopec Int'l Petroleum   $ 2,442,000,000.00
Activision Blizzard   Tencent Holdings   $ 2,339,000,000.00
Waldorf Astoria   Anbang Insurance   $ 1,950,000,000.00
TOTALS:       $ 99,032,000,000.00

More than $1 trillion of FDI (foreign direct investment) is projected to flow from China into the global economy by 2020, which could prove extremely economically beneficial for the recipients. For example, in Alabama, Golden Dragon Precise Copper Tube Group revived the region by building a $100 million manufacturing facility that employs three hundred (300) workers. In West Los Angeles, Chinese company Tencent Holdings Ltd bought a majority stake in Riot Games, which produces the popular "League of Legends" computer game, in 2011 for $250 million. In eastern Virginia, Shuanghai International Holdings of Hong Kong spent $4.7 billion to buy Smithfield Foods Inc., the largest U.S. pork producer with 3,700 employees. In Chico, California, Chinese based Alibaba Group is employing one hundred thirty (130) people at its US retailer, 11 Main Inc. Chinese conglomerate Dalian Wanda purchased a majority stake in AMC Entertainment Holdings, Inc., the large movie theater chain owner, in Leawood, Kansas for $2.6 billion as well as the Robinsons-May department store in Beverly Hills, California. Downtown LA also hosts two major mixed retail and residential complexes built by Chinese developers, Greenland Group's Metropolis project and Oceanwide Real Estate Group's Fig Central with total investment of $2 billion. Recently, the Alibaba Group executed an investment deal with Snap Chat for $200 million, and the Anbang Insurance Group purchased the Waldorf Astoria hotel.

Educational Investment

Education plays a significant role in Chinese decisions to buy American real estate. Chinese students comprise the largest group of international pupils, buoyed by a growing Chinese middle class who are willing to pay top dollar for their children's educations. At the university level, Chinese students now make up 31% of international students in the USA, with many students attending universities in the Midwest now. In 2004-2005, only 62,623 Chinese nationals were studying in the United States. In the 2014-2015 academic years, more than 304,000 Chinese students were enrolled in U.S. colleges and universities, a fivefold increase from a decade earlier. One way to track enrolled students is by F-1 visas, the most commonly issued student visa, and are a strong proxy for the Chinese enrollment numbers. The Top 10 institutions that have issued F-1 visas to Chinese students are listed below:

  1. University of Illinois-Champaign
  2. University of Southern California
  3. Purdue University
  4. Northeastern University
  5. Columbia University
  6. Michigan State University
  7. Ohio State University
  8. UCLA
  9. Indiana University
  10. University of California, Berkeley


As the global economy progresses, the strong ties currently being forged between China and the United States via corporate and educational investment will serve both countries well. While trade is a valuable bond between sovereign nations, mutually-assured prosperity, by means of investment, is perhaps the strongest economic bond available. The United States and China will be partners, and competitors for years, so developing the skills to collaborate and work together are essential. In the educational system, the mingling of perspectives from incoming Chinese students and U.S. students will build bridges between both countries by engendering critical and independent thinking, promoting diversity and integration, and building commonality that can be relied upon in adulthood and future business dealings.
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