How much will your next data breach cost?

Explores recent cyberattacks on the middle market and how to prevent a data breach.

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How much will your next data breach cost?

INFOGRAPHIC | May 24, 2023 | Authored by RSM US LLP

Cyberattacks have quickly become a top concern for every company. Breaches into large organizations generate headlines, but small and middle market companies actually suffer the lion’s share of attacks.

3,403

new and updated cyber insurance claims were collected in 2022 with…1


98%

…of those from companies with less than $2 billion in annual revenue2

20%

of middle market companies surveyed in RSM’s 2023 Cybersecurity Special Report admitted to a data breach in the past year3


68%

middle market executives anticipate unauthorized users will attempt to access data or systems in the next year4

There are several kinds of cyberattacks, and organizations must defend against all types in order to keep their data safe.

50%

Ransomware and business email compromise were the two leading causes of loss, accounting for nearly 50% of all claims over the past two years5

63%

In 2023, 63% of middle market leaders felt that their organization was at risk of a ransomware attack in the next 12 months6

76%

And 76% of middle market leaders reported their company was at risk of an attack by manipulating employees in the next 12 months7

The range of damage varies from one breach to the next, but reputational damage may be the greatest expense of all.


  • The number of records exposed ranged from 2 to over 300 million…8

  • …with the claims ranging from less than $1,000 to over $300 million9

  • The average incident cost for middle market companies was $198,00010

Middle market organizations are actively upgrading defenses and implementing new solutions to avoid costly breaches.

61%

Updating security protocols

61%

Utilizing a cyber insurance policy to protect against internet-based risks

49%

Enhancing the security of existing remote workforce solutions

49%

Strengthening staff training and education efforts

36%

Moving or migrating data to the cloud as a result of security concerns

Cyberattacks may be part of how we all do business now, but data breaches don’t have to be.


1. NetDiligence Cyber Claims Study 2022 Report

2. NetDiligence Cyber Claims Study 2022 Report

3. RSM US Middle Market Business Index: Cybersecurity Special Report 2023

4. RSM US Middle Market Business Index: Cybersecurity Special Report 2023

5. NetDiligence Cyber Claims Study 2022 Report

6. RSM US Middle Market Business Index: Cybersecurity Special Report 2023

7. RSM US Middle Market Business Index: Cybersecurity Special Report 2023

8. NetDiligence Cyber Claims Study 2022 Report

9. NetDiligence Cyber Claims Study 2022 Report

10. NetDiligence Cyber Claims Study 2022 Report

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This article was written by RSM US LLP and originally appeared on May 24, 2023.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/risk-fraud-cybersecurity/how-much-will-your-next-data-breach-cost.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

Financial Tasks to Tackle in the Month of May

Now that spring is here, it might be a great time to give your finances a fresh look. Here are a few key items to put on your May to-do list.

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Financial Tasks to Tackle in the Month of May

ARTICLE | MAY 10, 2023 | Authored by SERVICE2CLIENT

 

Now that spring is here, it might be a great time to give your finances a fresh look. Here are a few key items to put on your May to-do list.

Say Bye-Bye to PMI

If you bought your home for less than 20 percent down, there’s a good chance you’ve been paying private mortgage insurance (aka PMI) on your loan, which is usually an extra 1 percent of what you paid. But here’s the good news: the rise in home prices over the past few years has meant one thing — a bump in your home equity. If your equity position is now at least 20 percent of the original purchase price, you might not have to keep paying your PMI. All you need to do is contact the company that services your mortgage and check things out. You might have to pay several hundred dollars for a new appraisal, but when you compare it to the thousands you could save in a year, it’s well worth it.

Take Advantage of 529 Day

That would be May 29, a day that has been reserved to remind parents of future college students to start saving in a tax-advantaged 529 savings account. Here’s how it works: whatever amount you put in it grows tax-free. And better still, you won’t pay any taxes on withdrawals used to pay for qualified college expenses. You can also use up to $10,000 tax-free for qualified K-12 expenses. How sweet is that?

Get Rid of Unnecessary Financial Documents

Do you have stacks of old tax returns, bill stubs, and old ATM and bank deposit receipts collecting dust inside your filing cabinet? If so, spring is a good time to go through and shred them. For instance, you can toss tax returns after 10 years and ATM and bank receipts after just one year. If you don’t have a shredder, check to see if and when your city holds free shredding days. And don’t forget about your computer, external drives, and mobile devices that also might be getting full. A great resource to securely delete your personal documents is Eraser, a free software program for PCs. Last but not least, clean out your phone. Take a few minutes to delete any unused apps. Digital spring cleaning is always a great idea.

Review Recurring Charges

Do you really need that magazine subscription? How about the channel you bought to watch a show but forgot to cancel? These are the kinds of small charges that can really add up — and cost you over time. Take a look at your credit card statements, give them a good once over, highlight the ones that can go, and then start the process of canceling. If you want to help streamline this process, check out free apps like Rocket Money and Trim. It’ll feel so good when you’re finished.

Budget for Home Improvement Projects

During May, especially Memorial Day, you can find big discounts on materials for all those projects around the house you want to dive into this summer. It’s best not to wait because prices can climb in June and July. If you’re thinking of bigger projects like putting in a deck or repairing your roof, you might need help. That’s why buying the materials in May could help you stretch your budget when it’s time to hire people to do the work. Even if you aren’t 100 percent ready to get started, you can still measure how much decking or roofing you’ll need and take advantage of holiday sales.

Whether you’re saving up, cleaning up or clearing out, May is a great month to take stock of your finances. Who knows? It might put a little spring in your step.

Sources

https://www.consumerreports.org/financial-planning/may-financial-to-do-list/

 

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RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

Different Ways to Value a Business

When it comes to valuing a business, there are many ways to examine a company’s profitability. Looking at a business’ liquidation value and its breakup value are two of many approaches to see how a company is functioning and how it might run under different management and economic environments.

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Different Ways to Value a Business

ARTICLE | MAY 10, 2023 | Authored by SERVICE2CLIENT

 

When it comes to valuing a business, there are many ways to examine a company’s profitability. Looking at a business’ liquidation value and its breakup value are two of many approaches to see how a company is functioning and how it might run under different management and economic environments.

Liquidation Value

This type of valuation can be defined as the difference between what tangible assets would sell for at auction minus outstanding liabilities. Typically, intangible assets are not considered in this type of valuation. However, if the intangibles along with the physical assets, are considered for sale and not sold at auction, it would be considered a business’ “going-concern value.” Examples of intangibles include goodwill, brand recognition, patents, etc.

There are many considerations when exploring liquidation value. Generally speaking, the liquidation value is more than the salvage value but less than the book value. When a company is going out of business and assets are auctioned off, proceeds will normally be valued below the asset’s historical cost. Historical cost refers to how assets are reported on the balance sheet. However, if the market assesses assets lower in value compared to business use, it could be lower than book value.

Here is an example of how liquidation value can be calculated. Say a business has liabilities of $1.1 million. Based on the balance sheet, the book (or historical) value of assets is $2 million; and assets have a salvage value of $100,000. If the value of selling the business’ assets via auction is projected to be $0.80 per dollar, it could be expressed as follows:

$1.6 million (assets sold at auction at $0.80 per dollar) – $1.1 million (liabilities) = $500,000 (Liquidation Value)

Breakup Value

Also known as “the sum-of-parts value,” the breakup value determines the worth of a corporation’s individual segments if they were operating independently. Investors might pressure the company to spin off one or more segments into a separate publicly traded company to maximize its value.

For each operating unit, the first step involves determining the segment’s cash flow, revenue, and earnings. Such valuations can be benchmarked to publicly traded industry peers to determine comparative value of the business segment in question.

Financial ratios, including price-to-earnings (P/E) or price-to-free cash flow, are examples of starting points that analysts use to compare segmented business lines to industry peers to determine if it’s trading at below fair value, fair value or above fair value.

For example, if the P/E ratio of the company being analyzed is lower than its peers, it could mean the company is cheaper or trading below fair value on an earnings basis. Though a more thorough financial analysis and assessment of macroeconomics is recommended, such as interest rates, inflation, etc., analysts could make an educated projection on how future earnings may or may not hold up in the future, compared to the business segment’s snapshot valuation.

Another way to evaluate is via discounted cash flows (DCF). This shows the segment’s future free cash flow projections through a discount rate, generally the weighted average cost of capital (WACC). The formula arrives at the present value of the business segment’s future cash flows. The following DCF example can tell the expected profitability and how to treat it going forward as part of the business:

Assume the company’s WACC is 10 percent; the amount invested is $5 million; it will last three years, and the annual estimated cash flows are as follows:

Cash Flow                Discounted Cash Flow

Year 1: $2 million       $1,818,181.82

Year 2: $4 million       $3,305,785.12

Year 3: $6 million       $4,507,888.81

Compared to the amount invested of $5 million for the business’ selected business segment, the discounted cash flows for the project are $9,631.855.75. This could give an indication of how the business line might do if it’s spun off or how its performance will impact other lines of the business financially.

While valuation is subjective, especially in periods of volatile inflation and interest rate conditions, the more points of valuation analysis that occur, the better the chances that valuations will turn out to be correct.

 

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RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

Pre-revenue companies pursuing R&D may meet active trade or business requirement

Companies engaged in research and development activities for new products may want to consider spin-off transactions under section 355.

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Pre-revenue companies pursuing R&D may meet active trade or business requirement

ARTICLE | May 10, 2023 | Authored by RSM US LLP

Executive summary: IRS recognizes extended R&D period for pre-revenue businesses

Companies engaged in research and development activities for new products may want to consider spin-off transactions under section 3551 as a way to attract new capital investment to specific segments of its business.

Until relatively recently, the IRS has required there to be collection of income to meet the active trade or business (ATB) requirement as a condition for issuing a favorable private letter ruling, or PLR. However, the IRS now recognizes that certain industries, including the pharmaceutical and technology industries, may have an extended R&D period and regulatory approval processes during which there is no revenue or collection of income, but during which activities otherwise indicative of an active business are being conducted. As a result, the IRS is now willing to entertain PLR requests along these lines; they may consider ruling favorably on the ATB requirement in certain cases where no income has yet been collected.

Pre-revenue companies pursuing R&D may meet active trade or business requirement

Background: Collection of income and the ATB requirement

Section 355 allows for the tax-free distribution of a line of business (or businesses) through a controlled subsidiary, subject to certain statutory and regulatory requirements. One of the key requirements is the ATB requirement under section 355(b). The ATB requirement mandates that the taxpayer carry on a group of activities for the purpose of earning income or profit for each of the five years immediately preceding the distribution. The regulations state that such activities “ordinarily” include the collection of income and the payment of expenses for each of those five years.2

Historically, the IRS required collection of income as a condition for issuing a private letter ruling to meet the ATB requirement. This requirement posed a significant obstacle for certain industries, particularly life sciences and technology companies engaged in extensive R&D activities. These companies often face an extended R&D period and regulatory approval processes during which there is little if no collection of income.

Favorable developments since 2018

In 2018, the IRS announced3 that it intended to undertake a study regarding the ATB requirement and certain types of ventures in which the collection of income is significantly delayed. The statement noted that the IRS had “observed a significant rise in entrepreneurial ventures whose activities consist of research and development in lengthy phases” and that it would consider such ventures in its private letter ruling program.

In connection with this change in letter rulings policy, the IRS now recognizes that certain industries, including the pharmaceutical and technology industries, may have an extended R&D timeline and regulatory processes during which there is no collection of income, but otherwise show indicia of the active conduct of a trade or business. As a result, the IRS is now willing to issue PLRs in certain cases even where there has yet been no collection of income.

Since the 2018 announcement, the IRS has issued PLR 202009002, PLR 202150004 and PLR 202246008 consistent with this new approach.

The most recent and most advantageous PLR (PLR 202246008) involved a privately held corporation in the life sciences industry engaged in R&D activities for Product X and Product Y. The corporation had not yet collected income associated with either product but had incurred substantial, continuing operating expenses representing the active conduct of a trade or business with respect to researching and developing Product X and Product Y for each of the past five years. Despite not having any income (including grant income) in the preceding five years, the IRS ruled privately that the corporation’s spin-off of Product Y was non-taxable under section 355.

Taxpayer takeaways

Companies engaged in R&D for new products face long lead times and significant expenses before they can commercialize their products. In many cases, there will be a business need to separate certain lines of business from others, for example, to obtain needed capital. The IRS’s recognition of this fact, and the often-lengthy regulatory approval processes, have moved the agency to allow for greater flexibility in meeting the ATB requirement. Moreover, additional changes in the letter rulings program provide for a faster processing period of 12 weeks in some cases.4

This recent change in IRS policy regarding the ATB requirement provides an opportunity for companies in this industry to satisfy this requirement. Interested companies should consult with tax advisors to determine whether they may qualify for a tax-free distribution under section 355, even without the collection of income.


1 All section references are to the Internal Revenue Code of 1986, as amended, or to underlying regulations.
2 Treas. Reg. sec. 1.355-3(b)(2)(ii)
3 IRS statement regarding the active trade or business requirement for section 355 distributions, dated Sept. 25, 2018, available on the IRS website.
4 Rev. Proc. 2022-10, 2022-6 IRB (Jan. 14, 2022).

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This article was written by Patrick Phillips, Mark Schneider, Nate Meyers and originally appeared on 2023-05-10.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/business-tax/pre-revenue-companies-r-and-d-active-trade-business-requirement.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

How to Look at Liquidity through an Accounting Lens

Liquidity refers to a business’s ability to convert its short-term assets or securities into cash quickly to meet its short-term financial obligations or pay bills due within the next 12 months. Naturally, cash is the most liquid. This is different than solvency, which refers to the ability of a business to satisfy its long-term bills.

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How to Look at Liquidity through an Accounting Lens

ARTICLE| MAY 9, 2023 | Authored by SERVICE2CLIENT

Liquidity refers to a business’s ability to convert its short-term assets or securities into cash quickly to meet its short-term financial obligations or pay bills due within the next 12 months. Naturally, cash is the most liquid. This is different than solvency, which refers to the ability of a business to satisfy its long-term bills.

It’s important to distinguish between market liquidity and accounting liquidity. Market liquidity implies how a nation’s stock market or real estate market functions, specifically if there are enough buyers and sellers. The closer the bid and ask prices are, the greater the level of liquidity that exists. The greater the liquidity, the easier it is for participants to transact.

Determining the liquidity of a business helps investors see how a company balances its cash. This demonstrates how well a company manages its ability to pay bills versus being able to direct money for retained earnings, dividends, reinvesting in its business, or for acquisitions. When it comes to measuring liquidity, there are three ratios that estimate how liquid a business is: current, quick, and cash ratios.

Current Ratio

This compares current assets to current liabilities. It’s expressed as follows:

Current Ratio = Current Assets / Current Liabilities = $20,000 / $5,000 = 4

This means for every $1 in outstanding bills, the company has $4 in cash available to satisfy those debts. While each industry has a unique target ratio, a range of 1.5 to 2.5 is seen as a healthy measure.

Quick Ratio (Acid-Test Ratio)

This calculation removes inventories and some short-term assets that are more illiquid than incoming payments expected to be paid within a reasonable short-term time frame, such as accounts receivable. It’s expressed as:

Quick Ratio = (Cash and Cash Equivalents + Short-Term Investments + Accounts Receivable) / Current Liabilities

If the resulting number is less than 1, this could indicate the business is facing an inability to pay its short-term bills.

Cash Ratio

This looks at how well a company can pay off short-term debt with its cash and similar financial assets that can be converted to cash instantaneously. It’s expressed as follows:

Cash Ratio = Cash and Cash Equivalents / Current Liabilities = $10,000 / $3,000 = 3.33

With a 3.33 ratio, this example shows the company is in good shape liquidity-wise. A general reference of at least 0.5 (but higher shows better financial health) is recommended.

Interpreting Results

Once the results are calculated, businesses can analyze their findings and see the financial position of their company. For example, if they are looking for financing, lenders take into account these ratios to determine a level of confidence in debt repayment. If a company is looking for investors, savvy investors can determine how competitive the company is against its industry/sector competitors.

Internal Company Reflection

Depending on the company’s circumstances, changes might need to be implemented immediately and over the long term. A business may need to look at operating costs to cut costs. Cash flow projections are recommended to see how the company is doing on its restructuring and cost-cutting efforts.

When it comes to managing liquidity, using these ratios along with short- and long-term planning to improve a company’s financial and liquidity position can make a business more attractive to lenders and investors and more resistant to economic downturns.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890