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Board for Licensing Contractors

Contracting License Step 2

 

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STEP 2 - FINANCIAL STATEMENT

 

WHO MUST PREPARE THE FINANCIAL STATEMENT?

The law requires a Reviewed or Audited financial statement which must be prepared by a licensed independent firm. There is no exception!

 

Contact a Certified Public Accountant (CPA) or a Licensed Public Accountant who is actively licensed to prepare a "Reviewed" or "Audited" financial statement. They may be licensed in the state where the business operates. In Tennessee, you may check with the Tennessee Board of Accountancy to perform a License Search to verify if they are properly licensed as both a firm and individually, to perform an audit or review.

 

WHAT TYPE OF FINANCIAL STATEMENT IS REQUIRED?

The CPA must prepare a *current financial statement with a:

 

  • **Reviewed opinion (required for a monetary limit of $1,500,000 or less); or
  • ***Audited opinion (required for a monetary limit exceeding $1,500,000); and based on
  • Generally Accepted Accounting Principles (GAAP).

*Current is considered less than 12 months

**At renewal time, a "Review" would not be required; may supply an in-house financial statement or "Compiled"

***At renewal time, an "Audit" would not be required and a "Reviewed" would be acceptable

 

General Information on Financial Statements

  • Compiled financial statements are NOT acceptable for the entity obtaining a new license.
  • Financial statements prepared on an income tax basis are NOT acceptable.
  • Contractor licenses are issued according to the legal NAME appearing on the financial statement and the name should match on ALL related information, such as the Charter, Articles of Organization, and Line of Credit, Contractor’s Affidavit or *Guaranty Agreement. In addition, the contractor should only operate in the name as licensed. If the entity obtaining the license is a subsidiary, an in-house statement may be supplied with the parent's audit and guaranty agreement.
  • Guaranty Agreement is required with a cash only financial statement and when it's not an operating statement. The Guaranty must include a personal financial statement from the owner(s) or the parent company guarantying the entity.
  • The Board may require a Guaranty with personal financial statements if the working capital is mainly accounts receivable (may supply an update showing the receivables have been collected).

 

*A Bond in the Board's format may be supplied in lieu of the Guaranty Agreement, in the amount of $500,000; or $1,000,000 for an Unlimited monetary limits. (At renewal time, the Guaranty Agreement is expired and a new one would be needed to replace. The Bond may be removed by making a request to the Board and providing an updated financial statements meeting the requirements, to replace it.) See the "Forms and Downloads" for more information on "Bonds and Guaranty Agreements".

 

IS THE FINANCIAL STATEMENT CONSIDERED PUBLIC RECORD?

Please review T.C.A. section 62-6-111 of the law. The financial statement portion of the application is not public information and considered confidential (may be released only by a Subpoena with an Order of Protection). Effective September 25, 2012, the Board considers the Guaranty Agreement as part of the financial statement.

 

WHY IS A FINANCIAL STATEMENT NEEDED?
Every contractor is assigned a monetary limit on their license, as to the size of project they wish to contract or bid. This limit must cover the total project and it cannot be split into phases of smaller contracts to circumvent the law. The total contract should include materials, labor, and profit. For example, if a residential contractor is building a house for a consumer, on their land, the land would not be part of the contract. However, if the contractor is not building on the consumer's land, then it would be part of the total contract price; could not be split into two contracts, one for land and one for the house. In addition, there is not a limit on the amount of single projects ongoing. A contractor with a $200,000 limit may construct as many of these homes as long as each one does not exceed the limit. A contractor is allowed a 10% tolerance, unless they have a BC-A/r classification (residential restricted limited license).

 

Monetary Limit Determination

  1. Inform your accountant of the size license you need.
    • For example, if you plan to contract homes no more than $150,000 per contract, your CPA can help determine if your financial statement meets the criteria.
  2. Monetary limits are based 10 times the lesser of both working capital and net worth (plus experience).
    • In order to hold a license with a limit of $150,000, you would need to show working capital and net worth of at least $15,000, as well as experience for this amount.
    • Since the limit is based on the lesser of the two, a contractor with a working capital of $10,000 and net worth of $200,000 would qualify monetarily for a limit of $100,000.
      • The contractor could supplement their reviewed for audited financial statement with a "Line of Credit" (on the Board’s format) in the amount of $5,000 to increase working capital; or
      • Submit a personal or parent company financial statement with a *"Guaranty Agreement".
    • Personal supplemental financial statements may be prepared by the contractor, in addition to the required review or audit.
  3. The Board may limit the monetary license limit based on prior experience. Be sure to list all experience of owners and officers.
  4. If the working capital is mainly uncollected accounts receivable, the Board may not utilize the full amount.

 

*A Bond in the Board's format may be supplied in lieu of the Guaranty Agreement, in the amount of $500,000; or $1,000,000 for an Unlimited monetary limits. (At renewal time, the Guaranty Agreement or Bond may be removed by making a request to the Board and providing an updated financial statement meeting the requirements, to replace it.)

 

Unlimited License Limit

To obtain an unlimited monetary limit on a license, the contractor must show $300,000 in both, working capital and net worth, as well as experience, with an audited financial statement. Cash only statements must include a Guaranty Agreement, as well as those with the majority of uncollected accounts receivables. At renewal time, a contractor may supply a "Reviewed" financial statement for unlimited. If their financial statement supports the limit without the guaranty or bond, the contractor may request to have it removed.

 

Working Capital and Net Worth

Please ask your CPA/LPA to determine the amount of your working capital and net worth to ensure you qualify for the limit requested. Please take in consideration of experience and whether the majority is uncollected receivables. Working capital is current assets minus current liabilities. Net worth is total assets minus total liabilities.

 

CURRENT ASSETS are cash and those assets that are reasonably expected to be realized in cash or sold or consumed within one year or within a business’s normal operating cycle if it is longer. Generally, current assets include the following:

  • Cash and cash equivalents available for current operations
  • Marketable securities representing the investment of cash available for current operations, including investments in debt and equity securities classified as trading securities.
  • Under billings on work in progress
  • Inventories (to include materials and/or houses built for sale). Also, developed lots for sale. Raw, undeveloped land is not a current asset.
  • Retirement Plans, specifically an IRA, 401K and Profit Sharing, will be allowed at 50%
  • Cash surrender value of life insurance policies
  • Trade accounts receivable and notes and other receivables that are expected to be collected within one year (if this amount represents the majority of working capital, the Board may not utilize the full amount without a guaranty and personal financial statement)
  • Prepaid expenses such as insurance, interest, rents, taxes, etc.

NON-CURRENT ASSETS are the following and not current assets, since they generally are not expected to be converted into cash within one year:

  • Related party or owners receivables (not allowed as a current asset)
  • Cash restricted for special purposes (Restricted cash may be classified as a current asset if it is considered to offset maturing debt that has been properly classified as a current liability)
  • Long term investments
  • Receivables not expected to be collected within one year
  • Land and other natural resources
  • Depreciable assets (buildings, equipment, tools, etc.)
  • Prepayments or deferred charges that will not be charged to operations within one year
  • *Notes receivables from stockholders/related parties

*The Board may accept a Guaranty Agreement from stockholders or related parties, supplied with their financial statement, to consider counting this as a current asset.

 

 

CURRENT LIABILITIES are obligations whose liquidation is reasonably expected to require (a) the use of current assets or (b) the creation of the other current liabilities. Generally, current liabilities include the following:

  • Payables for materials and supplies
  • Line of Credit balances and credit card balances
  • Amounts collected before goods or services are delivered (over billings on jobs in progress)
  • Accruals for wages, salaries, commissions, rents, royalties, and taxes
  • Other obligations, including portions of long-term obligations, that are expected to be liquidated within one year*

 

NON-CURRENT LIABILITIES do not include long term notes, bonds, and obligations that will not be paid out of current assets.

 

* All financial statements submitted should separate current portion of long term debt according to standard accounting principals.*

 

Monetary Limit

The monetary limit is the total dollar amount per each individual contract or project. A contractor cannot split a contract into phases to work within their limit, however, a 10% tolerance is allowed. A contractor with a monetary limit of $150,000 may contract up to $165,000 without being in violation (see Rule 0680-01-.13). In addition, there is no limit of the number of projects a contractor may perform, as long as a project has not been split into phases to circumvent the law.

 

Line of Credit

 

A Line of Credit (LOC) [pdf] in the Board’s exact format, may be considered to supplement working capital. (The Line of Credit must be in the same name as on financial statement, and must be in the EXACT format or it will not be acceptable.)

 

OTHER

The Board may require the submission of additional financial information and may also require the financial statement to be audited and attested to by a certified public accountant (CPA). In addition, the financial statement may be examined by the Comptroller of the Treasury or their designee. The Board is charged with the responsibility of protecting the safety and welfare of the public, therefore, required to ensure the financial solvency of an entity obtaining a license. TCA 62-6-111; TCA 62-6-116; 62-6-124; Rule 0680-1-.13; Rule 0680-1-.14; and Rule 0680-1-.15.

 

 

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