We are pleased to release MaloneBailey's April 2018 issue of The Crunch, our newsletter highlighting recent accounting and regulatory updates. Please note that the updates provided in this newsletter are not a comprehensive list.  We encourage you to visit the SEC and FASB websites for more information as well as a complete list of updated rules, regulations and proposals.  We invite you to contact us should you have any questions about the information provided in this issue.  We invite you to visit our website to review archived versions of this newsletter containing past accounting, regulatory and tax updates.

The MaloneBailey Team
What's the Crunch?

Featured Podcast
Accounting and Regulatory Updates

Recent FASB Updates & Proposals
       Featured Podcast
PodcastThe April 2018 edition of The Crunch features a three-part podcast series on uplisting or upgrading between market tiers. Representatives from Nasdaq, NYSE and OTC share their insightful perspectives on the process, criteria and how to navigate common challenges as it pertains to uplisting or upgrading. Click on each image below to listen to the podcast. 


 

 
          Recent FASB Updates & Proposals 

SummaryThe FASB has issued Accounting Standards Update (ASU) No. 2018-03, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, that clarifies the guidance in ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10), as follows:
  • Issue 1: Equity Securities without a Readily Determinable Fair Value- Discontinuation - The amendment clarifies that an entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer. Once an entity makes this election, the entity should measure all future purchases of identical or similar investments of the same issuer using a fair value method in accordance with Topic 820.
  • Issue 2: Equity Securities without a Readily Determinable Fair Value- Adjustments - The amendment clarifies that the adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place.
  • Issue 3: Forward Contracts and Purchased Options - The amendment clarifies that remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities.
  • Issue 4: Presentation Requirements for Certain Fair Value Option Liabilities - The amendment clarifies that when the fair value option is elected for a financial liability, the guidance in paragraph 825-10- 45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15, Derivatives and Hedging- Embedded Derivatives, or 825-10, Financial Instruments- Overall.
  • Issue 5: Fair Value Option Liabilities Denominated in a Foreign Currency - The amendments clarify that for financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument-specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability. Then, both components of the change in the fair value of the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates.
  • Issue 6: Transition Guidance for Equity Securities without a Readily Determinable Fair Value - The amendment clarifies that the prospective transition approach for equity securities without a readily determinable fair value in the amendments in ASU No. 2016-01 is meant only for instances in which the measurement alternative is applied. An insurance entity subject to the guidance in Topic 944, Financial Services- Insurance, should apply a prospective transition method when applying the amendments related to equity securities without readily determinable fair values. An insurance entity should apply the selected prospective transition method consistently to the entity's entire population of equity securities for which the measurement alternative is elected.
For public business entities, ASU 2018-03 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt ASU 2018-03 until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in ASU 2016-01. For all other entities, the effective date is the same as the effective date in ASU 2016-01.

All entities may early adopt ASU 2018-03 for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted ASU 2016-01.

For more information, click here.
 
© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.


Summary  The FASB has issued a proposed ASU that would clarify the accounting for implementation costs related to a cloud computing arrangement that is a service contract. If adopted as proposed, the proposed ASU also would enhance disclosures around implementation costs for internal-use software and cloud computing arrangements. Stakeholders are encouraged to review and provide comment on the proposal by April 30, 2018.
 
In April 2015, the FASB issued ASU No. 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, to help companies evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license.
 
During the comment period and after the issuance of the standard, several stakeholders asked the FASB to provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. Because existing guidance is not explicit in that area, the FASB decided to issue this proposed ASU to address the resulting diversity in practice.
 
If adopted as proposed, the amendments in this proposed ASU would align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license), as well as require an organization to disclose certain qualitative and quantitative information about implementation costs associated with internal-use software and all hosting arrangements, not just hosting arrangements that are service contracts. The accounting for the service element of a hosting arrangement that is a service contract would not be affected by the proposed amendments.

For more information, click here.
 
© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

ASU2018-220Inclusion of the Overnight Index Swap (OIS) Rate Based on the Secured Overnight Financing Rate (SOFR) as a Benchmark Interest Rate for Hedge Accounting Purposes - FASB Proposed ASU 2018-220-Derivatives and Hedging (Topic 815)

Summary  The FASB issued a proposed Accounting Standards Update (ASU) that would expand the list of U.S. benchmark interest rates permitted in the application of hedge accounting. The comment due date is March 30, 2018.
 
FASB Accounting Standards Codification®  Topic 815, Derivatives and Hedging, provides guidance on the risks associated with financial assets or liabilities that are permitted to be hedged. Among those risks is the risk of changes in fair values or cash flows of existing or forecasted issuances or purchases of fixed-rate financial assets or liabilities attributable to the designated benchmark interest rate (referred to as interest rate risk).
 
In the United States, eligible benchmark interest rates under Topic 815 are interest rates on direct Treasury obligations of the U.S. government (UST), the London Interbank Offered Rate (LIBOR) swap rate, the Overnight Index Swap (OIS) Rate based on the Fed Funds Effective Rate, and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate.
 
Based on concerns about the sustainability of LIBOR, a committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York recently identified a broad Treasury repurchase agreement (repo) financing rate referred to as the Secured Overnight Financing Rate (SOFR) as its preferred alternative reference rate.
 
The proposed ASU would add the OIS rate based on SOFR as a fifth U.S. benchmark interest rate to help companies and other organizations avoid the potential cost and complexity associated with using different cash flows and discount rates to measure the hedged item and the hedging instrument.

For more information, click here.
 
© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

FASB04Tax Cuts and Jobs Act - FASB Adds SEC Guidance to the Codification on the Tax Cuts and Jobs Act

SummaryThe FASB has issued Accounting Standards Update (ASU) No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. ASU 2018-05 amends certain SEC material in Topic 740 for the income tax accounting implications of the recently issued Tax Cuts and Jobs Act (Act).
 
ASU 2018-05 adds the following guidance, among other things, to the FASB Accounting Standards Codification™ regarding the Act:
 
Question 1: If the accounting for certain income tax effects of the Act is not completed by the time a company issues its financial statements that include the reporting period in which the Act was enacted, what amounts should a company include in its financial statements for those income tax effects for which the accounting under Topic 740 is incomplete?
 
Answer 1: In a company's financial statements that include the reporting period in which the Act was enacted, a company must first reflect the income tax effects of the Act in which the accounting under Topic 740 is complete. These completed amounts would not be provisional amounts. The company would then also report provisional amounts for those specific income tax effects of the Act for which the accounting under Topic 740 will be incomplete but a reasonable estimate can be determined. For any specific income tax effects of the Act for which a reasonable estimate cannot be determined, the company would not report provisional amounts and would continue to apply Topic 740 based on the provisions of the tax laws that were in effect immediately prior to the Act being enacted. For those income tax effects for which a company was not able to determine a reasonable estimate (such that no related provisional amount was reported for the reporting period in which the Act was enacted), the company would report provisional amounts in the first reporting period in which a reasonable estimate can be determined.
 
Question 2: If an entity accounts for certain income tax effects of the Act under a measurement period approach, what disclosures should be provided?
 
Answer 2: The staff believes an entity should include financial statement disclosures to provide information about the material financial reporting impacts of the Act for which the accounting under Topic 740 is incomplete, including:
  • Qualitative disclosures of the income tax effects of the Act for which the accounting is incomplete;
  • Disclosures of items reported as provisional amounts;
  • Disclosures of existing current or deferred tax amounts for which the income tax effects of the Act have not been completed;
  • The reason why the initial accounting is incomplete;
  • The additional information that is needed to be obtained, prepared, or analyzed in order to complete the accounting requirements under Topic 740;
  • The nature and amount of any measurement period adjustments recognized during the reporting period;
  • The effect of measurement period adjustments on the effective tax rate; and
  • When the accounting for the income tax effects of the Act has been completed.
ASU 2018-05 is effective upon inclusion in the FASB Codification.

For more information, click here.
 
© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

FASB3Leases - FASB Discusses Targeted Improvements to Topic 842

SummaryAs reported in its "Summary of Board Decisions" publication, the FASB met on March 7, 2018, and discussed feedback received on proposed Accounting Standards Update (ASU, Leases (Topic 842): Targeted Improvements, specific to the proposed additional and optional transition method to adopt the new lease requirements of ASU 2016-02, Leases (Topic 842).
 
The FASB decided to affirm the proposed transition method and to clarify that if an entity elects this new transition method, the comparative periods should include the disclosures required under Topic 840, Leases, including the operating lease obligations disclosure in paragraph 840-20-50-2.

For more information, click here.
 
© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.


Summary - As reported in its "Summary of Board Decisions" publication, the FASB met on February 14, 2018, and discussed the status of and issues arising from implementation activities related to Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The FASB discussed its staff's response to:
  • General technical inquiries received that affect many stakeholders. No decisions were made.
  • Technical inquiries received related to prepayable financial instruments. Specifically, the FASB staff presented its interpretation of which financial instruments meet the definition of the term prepayable in the FASB Accounting Standards Codification Master Glossary. Financial instruments that meet the definition of prepayable include the following: (a) instruments that are currently exercisable and prepayable at any time; (b) instruments with certain contingent prepayment features (that is, based on the passage of time, the occurrence of a specified event other than the passage of time, and the movement in a specified interest rate); and (c) instruments with conversion features.
For more information, click here.
 
© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

             Recent SEC Updates & Proposals

Summary The SEC unanimously approved a statement and interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. SEC Chairman Jay Clayton indicated that "In today's environment, cybersecurity is critical to the operations of companies and our markets. Companies increasingly rely on and are exposed to digital technology as they conduct their business operations and engage with their customers, business partners, and other constituencies. This reliance on and exposure to our digitally-connected world presents ongoing risks and threats of cybersecurity incidents for all companies, including public companies regulated by the Commission. Public companies must stay focused on these issues and take all required action to inform investors about material cybersecurity risks and incidents in a timely fashion."
 
The interpretive guidance provides the SEC's views about public companies' disclosure obligations under existing law with respect to matters involving cybersecurity risk and incidents. It also addresses the importance of cybersecurity policies and procedures and the application of disclosure controls and procedures, insider trading prohibitions, and Regulation FD and selective disclosure prohibitions in the cybersecurity context. The SEC indicates that the SEC staff, through its Division of Corporation Finance filing review process, continues to monitor cybersecurity disclosures carefully.
 
The interpretive guidance is effective upon publication in the Federal Register.

For more information, click here.
 
© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.


SummarySEC Commissioner Robert J. Jackson, Jr. recently spoke about recent rumors that the securities industry is eager to include mandatory arbitration of shareholder disputes into an upcoming IPO. Jackson indicated that the "idea is that our Division of Corporation Finance will be forced to approve the IPO, stripping shareholders of their right to their day in court-and radically altering the balance between shareholders and corporate insiders." Topics discussed by Jackson included:
  • How the SEC polices corporate wrongdoing;
  • Impact of budgetary constraints on SEC enforcement; and
  • A potential path forward.
For more information, click here .
 
© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

SummaryThe SEC's Divisions of Enforcement and Trading and Markets issued a statement warning of potentially unlawful online platforms for trading digital assets. The SEC indicated that online trading platforms "have become a popular way investors can buy and sell digital assets, including coins and tokens offered and sold in so-called Initial Coin Offerings ("ICOs"). The platforms often claim to give investors the ability to quickly buy and sell digital assets."
 
The statement provides a number of considerations for investors using online trading platforms. The statement urges investors to consider asking a number of questions before they decide to trade digital assets on an online trading platform, including:
  • Do you trade securities on this platform? If so, is the platform registered as a national securities exchange?
  • Does the platform operate as an ATS? If so, is the ATS registered as a broker-dealer and has it filed a Form ATS with the SEC?
  • Is there information in FINRA's BrokerCheck ® about any individuals or firms operating the platform?
  • How does the platform select digital assets for trading?
  • Who can trade on the platform?
For more information, click here .
 
© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

SummarySEC Chairman Jay Clayton recently spoke about strengths of the SEC. Clayton indicated that the SEC has a "foundation of exceptional design and resilience, with the '33 and '34 Acts being the bedrock components. But, in comparison to companies that operate in the financial markets, the asset side of our balance sheet is far from extensive..." Clayton noted that for the SEC to maintain its goodwill, it must be nimble and forward-looking.

For more information, click here .
 
© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

SummarySEC Investor Advocate Rick Fleming recently discussed views on the issue of mandatory arbitration and, more specifically, on efforts to force public company shareholders to forego class action lawsuits and seek recovery individually through arbitration. Fleming indicated that this has been "a matter of concern to investors recently, after commentators have suggested that U.S. IPO issuers should consider including arbitration provisions in their articles or bylaws."
 
Fleming indicated that the idea of forced arbitration has been promoted as a way to reduce costs of securities litigation for public companies and thereby remove a perceived disincentive for companies to be public. Reportedly, it is too easy for plaintiffs' firms to bring dubious cases and win settlements, and some have argued that class action lawsuits, even meritorious ones, fail to compensate harmed investors in any meaningful way. Fleming cautioned that there "may be some validity to these concerns. But stripping away the right of shareholders to bring a class action lawsuit seems to me draconian and, with respect to promoting capital formation, counterproductive."

For more information, click here .
 
© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

SummarySEC Commissioner Kara M. Stein recently spoke about concerns about the increasing complexity in investment products being offered. Stein indicated that all investments "have at least some risk. And I recognize that there is a sliding scale of complexity. But what I would like to do is ask whether certain products are appropriate for all investors?" Stein went on to discuss concerns about complex products currently available to retail investors, including:
  • Derivatives;
  • Leveraged and passive investment strategies;
  • Volatility indexes; and
  • Structured products.
Stein cautioned that what concerns her is "the disconnect between what investors actually understand and what they really need to understand in order to have a fighting chance at using these products the way they are designed to be used." Stein indicated that the SEC, FINRA, and the product exchanges need the ability to understand the full impact of these complex products on investors and our markets. Stein also called for more accountability from certain "gatekeepers" to remember that there are real people behind each account number, who are "saving for college, retirement, or any number of financial goals. Gatekeepers should be part of the solution, not part of the problem."

For more information, click here .
 
© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
        Extra Crunch
OTC Markets Group Announces Launch of Stock Promotion FlagOTCEXTRA

This flag, shaped like a megaphone, will soon appear on the promoted company's quote page on otcmarkets.com. This easily identifiable designation will alert investors, regulators, and market participants to the presence of promotional activity.
 
Manipulative and misleading stock promotion is an industry-wide concern that harms investors, impedes capital formation and disrupts efficient pricing mechanisms of national exchanges and the OTC markets. OTC believes it is their responsibility to provide transparency to investors and encourage public companies to disclose and correct misinformation that can harm the efficient market pricing process and damage the integrity of their markets.  Anonymous, paid promotion should have no place in the public markets.

OTC Markets Group issuer compliance team actively monitors a variety of sources and collects input from their strong network of market participants to determine if a security is being promoted and performs research prior to publishing the information on otcmarkets.com.  The promotion flag will remain on the company's quote page until 15 days after the last promotional material is distributed.

Over the past few months, OTC Markets Group has published a Policy on Stock Promotion, issued Best Practices Guidelines for Issuers and launched their Compliance Statistics Page.   They continue to work with regulators to advocate for the modernization of promotion regulations, including requiring additional disclosure around paid stock promotion and identifying the people associated with these campaigns.

OTC Markets Group encourages all their companies to educate themselves on the manipulative practices stock promoters use. They will continue to monitor the market to identify adverse behavior and publicly identify securities that have become a target of bad actors.
 
In addition to the new stock promotion flag, OTC Markets Group has also added a shell risk flag. The shell risk designation indicates that a company may be a Shell Company, as defined by SEC rules. This designation is made at OTC Markets' discretion based on an analysis of company's key financial data.
 
OTC Markets Group welcomes your feedback and looks forward to working with you to further enhance their thriving OTC equity markets.

For more information, click here.


MaloneBailey Welcomes Nicole Zhao, Senior Tax ManagerNicole

MaloneBailey is excited to announce the addition of Nicole Zhao, CPA, Senior Tax Manager to our team! Nicole joins MaloneBailey from a Houston-based CPA firm where she managed tax engagements. Nicole also spent years at PricewaterhouseCoopers. She has experience in federal, state and international tax compliance, tax consulting and tax planning. Nicole holds a Master of Science degree in Taxation from San Jose State University in San Jose, California, and is a licensed CPA in the states of Texas and California.

Nicole specializes in oil & gas taxation and has experience with M&A transaction tax planning and calculation. She has worked with clients in multiple industries, including oil & gas, manufacturing, construction, real estate and high technology. Her tax service offering will also include inbound international tax compliance and advisory services. 

For more information about our tax practice and/or a complimentary estimate for tax services, please contact Nicole at 713.343.4271 or nzhao@malonebailey.com.

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Should you be interested in a complimentary estimate for audit or consulting services, please contact Caroline Rosen at crosen@malonebailey.com or 713.343.4286.