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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 accounting firm. Contact a Certified Public Accountant (CPA) or a Licensed Public Accountant (LPA) who is properly licensed to prepare a "Reviewed" or "Audited" financial statement in the name and mode of operation to be licensed.    Contractors should check with the license roster to ensure the *name they choose for the license is available and this may be confirmed at:  http://verify.tn.gov/

 

  • In Tennessee, you may check with the Tennessee Board of Accountancy to perform a License Verification Search to verify if they are properly licensed as both a firm and individually.
  • For those out of state, you may check at http://www.cpaverify.org/   to ensure the CPA is properly licensed in a state that has a non-resident Mobility agreement with Tennessee, approved to prepare an Audit or Review and follow substantially equivalent accounting standards and this may be confirmed at: https://www.cpamobility.org/
  • International guidelines are available at:  http://nasba.org/international/ 


*Effective July 1, 2014, the name cannot be similar to another licensee.

 

 

WHAT TYPE OF FINANCIAL STATEMENT IS REQUIRED?

Pursuant T.C.A. 62-6-111(b)(3-4), the CPA/LPA must prepare an Audited or Reviewed financial statement.  The Board requires the financial statement to be current (less than 12 months), and according to Generally Accepted Accounting Principles (GAAP).  

 

  • Reviewed Financial Statement (required for a monetary limit of $1,500,000 or less)
    • Renewal does not require a Review and an in-house statement may be provided
  • Audited Financial Statement (required for a monetary limit exceeding $1,500,000)
    • Renewal does not require an Audit; may supply a Review or Audit from a CPA

 

General Information

  • Compiled financial statements are NOT acceptable; must be a Reviewed for Audited financial statement prepared by a CPA/LPA.
  • Financial statements prepared on an income basis are NOT acceptable.
  • Income tax statements are not acceptable as a financial statement.
  • Contractor licenses are issued according to the legal NAME appearing on the financial statement and the name should match on ALL related information required in the new license application, such as the corporate Charter, Articles of Organization, Reference, Contractor’s Affidavit, Line of Credit, etc. In addition, the contractor should only operate in the name as licensed.
  • Subsidiary without Audit
    • Parent company may supply the Audited financial statement for a subsidiary obtaining the license, but must provide an indemnity, such as a Guaranty Agreement or Bond. 
    • An in-house financial statement must be provided by the subsidiary (entity obtaining the license), in addition to the parent company's audited financial statement and indemnity.



Guaranty Agreement Required

An indemnity, such as a Guaranty Agreement or Bond is required from the owner(s) (personal or parent) of the entity applying for the license whenever the financial statement provided shows a deficiency, such as:

  • Cash statement - cash without fixed assets, etc. (see Rule 0680-1-.13; considered deficient of plant and equipment); or
  • Accounts Receivables - make up the majority of working capital
    • Or - May supply update showing the Receivables have been collected
  • Personal Guarantor - Guaranty Agreement must include a personal financial statement from the owner(s) and is not required to be an audit or review; may self prepare personal supplemental financial statements with the entity's Review or Audit.
  • Parent Company Guarantor - Guaranty Agreement must include a financial statement from the parent company and it is not required to be an audit or review, unless, the subsidiary did not supply the audit or review.  May self prepare supplemental financial statements with the entity's Review or Audit.
  • 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.
  • Expiration of indemnities occurs at renewal time (no more than 2 years)

 

Indemnity forms are available at: http://www.tn.gov/regboards/contractors/documents/BLC-GuarantyAgreementPolicy.pdf 

 

IS FINANCIAL STATEMENT INFORMATION CONSIDERED PUBLIC RECORD?

No.  Please review T.C.A. 62-6-124.  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 indemnitites 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 providing their required review or audit.  Personal or parent supplemental statements are limited to 50% of working capital and net worth.
  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 with a supplemental financial statement, as well as those with the majority of capital listed as uncollected accounts receivables. At renewal time, a contractor may supply a "Reviewed" financial statement for unlimited.

 

Working Capital and Net Worth

Please ask your CPA/LPA to assist you with determining 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.

Note:  The Board does not consider notes receivables from related parties as a current asset

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.

 

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

 

Monetary Limit Assigned

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.  There is not a 10% tolerance for the BC-A/r restricted residential licensees.

 

 

Supplemental Working Capital and Net Worth

 

Line of Credit

A Line of Credit (LOC) in the Board’s exact format may be considered to supplement working capital, only (does not supplement net worth).  The LOC is an option available for those requesting a larger limit than one in which their financial statement qualifies.  The LOC must be in the same name as on financial statement, and must be in the EXACT format or it will not be acceptable.

 

Guaranty Agreement

A Guaranty Agreement (GA) may be supplied with a contactor's personal financial statement or parent company's financial statement to supplement the licensed entity's working capital and net worth. The supplemental statement is only used up to 50%.  For example, a contractor with a net worth of $50,000 is wanting a license for $1,000,000, which requires a net worth of $100,000.  In order to supplement the net worth on the personal statement, it would need show a minimum of $100,000 to be utilized as $50,000. 

 

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.

 

 

Financial Statement Resources

 

 

 

Forms and Downloads

 

More Valuable Resources

 

 

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