April 2020: Latest SEC, FASB & Tax Updates & COVID-19 Updates from the SEC, IRS, Etc.

We are pleased to release MaloneBailey's April 2020 issue of The Crunch, our newsletter highlighting recent accounting, regulatory and tax updates. Please note that the updates provided in this newsletter are not a comprehensive list.

We encourage you to visit the SEC , FASB and IRS 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. Please visit our website to review archived versions of this newsletter containing past accounting, regulatory and tax updates.

The MaloneBailey Team

www.malonebailey.com

What's the Crunch?

Featured Article

SEC Adopts Amendments to Reduce Unnecessary Burdens on Smaller Issuers by More Appropriately Tailoring the Accelerated and Large Accelerated Filer Definitions

Summary - In March 2020, the Securities and Exchange Commission (SEC) adopted amendments to the definition of accelerated filers and large accelerated filers. As a result, more companies can qualify as a smaller reporting company (SRC), which reduces burdens and compliance costs. For more information about the advantages of SRC status, please visit SEC.gov. Among the changes are a revenue test for exiting from both accelerated and large accelerated filer status and the possible elimination of including an internal control over financial reporting (ICFR) auditor attestation in the filing of Forms 10-K, 20-F and 40-F. Another change is lengthening the due dates for annual and quarterly reports to 90 calendar days and 45 calendar days, respectively.

Important points to know about the amendments:

If an issuer has less than $100 million in revenue and qualifies for SRC status, an ICFR audit is not needed, regardless of market cap.
If an issuer was not previously eligible for SRC status but has less than $80 million in revenue, an ICFR audit may not be needed, regardless of market cap.

For more information about these amendments, please click here .

Featured Podcast

PODCAST: Improving the Accounting for Modification of Share-Based Payment Awards

Summary - Our featured p odcast highlights FASB's accounting standards update regarding the improvement of accounting for modification of share-based payment awards. More specifically, the FASB guidance that clarifies that not all changes to share-based payment awards are necessarily accounted for as a modification. Please click on the image below to hear Collins Ncho, one of our supervising seniors, discuss the update.

For this podcast and many more, please visit the Resources section of the MaloneBailey website.

Recent FASB & AICPA Updates

FASB Accounting Standards Updates - No. 2020-03 —Codification Improvements to Financial Instruments

Summary - The FASB issued an Accounting Standards Update (ASU) that makes narrow-scope improvements to various aspects of the financial instruments guidance, including the current expected credit losses (CECL) standard issued in 2016.

The ASU is part of the FASB’s ongoing Codification improvement project aimed at clarifying specific areas of accounting guidance to help avoid unintended application. The items addressed in that project generally are not expected to have a significant effect on current accounting practice or create a significant administrative cost for most entities.

“The FASB decided to issue this financial instruments ASU separate from other Codification improvements to increase stakeholder awareness of the changes and to expedite the improvement process,” stated FASB Chairman Russell G. Golden. “It addresses areas brought to our attention by stakeholders, and it represents our ongoing commitment to support a successful transition to our standards.”

Among its improvements, the ASU clarifies that all nonpublic companies and organizations are required to provide certain fair value option disclosures.

For more information, click here .

Income Taxes- FASB Discusses Comments on its Proposal on Income Tax Disclosures

Summary - As reported in its “Summary of Board Decisions” publication, the met on February 12, 2020 and discussed comment letter feedback received on its March 2019 revised proposed Accounting Standards Update (ASU), Income Taxes (Topic 740): Disclosure Framework—Changes to the Disclosure Requirements for Income Taxes.

The Board directed the staff to perform research and outreach on potential alternatives to disclose certain disaggregated income tax information. The Board also directed the staff to perform additional research on various other proposed amendments.

For more information, click here .

SOC for Supply Chain- New AICPA Guide Published

Summary - This AICPA Guide, SOC for Supply Chain: Reporting on an Examination of Controls Relevant to Security, Availability, Processing Integrity, Confidentiality, or Privacy in a Production, Manufacturing, or Distribution System, has been developed by members of the SOC for Supply Chain Working Group of the AICPA Assurance Services Executive Committee (ASEC) in conjunction with members of the Auditing Standards Board (ASB).

The purpose of the guide is to assist practitioners engaged to examine and report on a system that produces, manufactures, or distributes products, including controls over one or more of the:

Security of the entity’s system;
Availability of the entity’s system;
Processing integrity of the entity’s system;
Confidentiality of the information that the entity’s system processes or maintains for customers and business partners; and
Privacy of personal information that the entity’s system collects, uses, retains, discloses, and disposes of for customers and business partners

For more information, click here .

Recent SEC & PCAOB Updates

Release No. 33-10762: Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities

Summary - The SEC adopted amendments to the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees. These changes are intended to both improve the quality of disclosure and increase the likelihood that issuers will conduct debt offerings on a registered basis.

The amended rules focus on “the provision of material, relevant, and decision-useful information regarding guarantees and other credit enhancements, and eliminate prescriptive requirements that have imposed unnecessary burdens and incentivized issuers of securities with guarantees and other credit enhancements to offer and sell those securities on an unregistered basis. In doing so, the final amendments are intended to improve disclosure and reduce the SEC registration-related compliance burdens for issuers, including the time burden of collecting information that will no longer be required, and provide investors with protections that would not be present in an unregistered offering.”

The amendments will be effective on January 4, 2021, but voluntary compliance will be permitted in advance of the effective date.

For more information, click here .

Release No. 33-10763: Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets

Summary - The SEC proposed a set of amendments that would harmonize, simplify, and improve the exempt offering framework to promote capital formation and expand investment opportunities while preserving and enhancing important investor protections.

The SEC indicated that offerings of securities must be either registered with the agency or qualify for an exemption from the SEC’s registration requirements. A majority of entrepreneurs and emerging businesses raise capital using the exempt offering framework. This capital formation activity ranges from seed capital for new businesses to growth capital for companies on the path to an initial public offering. The proposals are the most recent step in the SEC’s ongoing efforts to assess the capital raising framework as a whole and improve it for the benefit of investors, entrepreneurs, and more seasoned issuers.

The proposed amendments, which reflect a comprehensive retrospective review of the patchwork system built over many decades, “seek to address gaps and complexities in the exempt offering framework that may impede access to capital for issuers and access to investment opportunities for investors. The current framework has 10 exemptions or safe harbors, each with disparate requirements. The proposed rules are focused on reducing friction points in the offering framework to help market participants navigate the exempt offering process. For example, under the proposed rules an issuer in a qualified opportunity zone would have a clearer framework for how to conduct exempt offerings targeted to various investors, including community members, while still complying with important investor protections.”

The proposed amendments would:

Address, in one broadly applicable rule, the ability of issuers to move from one exemption to another, and ultimately to a registered offering, providing more certainty to issuers raising capital;
Increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits based on the Commission’s experience with the rules, marketplace practices, capital raising trends, and comments received;
Provide greater certainty to issuers and protection to investors by setting clear and consistent rules governing offering communications between investors and issuers, including permitting certain “demo day” activity without running afoul of the prohibition on general solicitation; and
Harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions to reduce differences between exemptions, while preserving or enhancing investor protections.
The public comment period for the proposed rule amendments will remain open for 60 days following publication of the release in the Federal Register.

For more information, click here .

Release No. 33-10765: Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts

Summary - The SEC announced that it has adopted a new rule and related form and rule amendments to simplify and streamline disclosures for investors about variable annuities and variable life insurance contracts. According to the SEC, the changes “permit the use of a concise, reader-friendly prospectus designed to improve investors' understanding of the contracts' features, fees, and risks. The framework's use of layered disclosure and technology will provide investors with a roadmap so that they can more easily access information that they need to make an informed investment decision. These changes are an important milestone in the Commission's ongoing efforts to improve the investor experience.”

The new rule permits variable annuity and variable life insurance contracts to use a summary prospectus to provide disclosures to investors. A summary prospectus is a concise, reader-friendly summary of key facts about the contract. More-detailed information about the variable annuity or variable life insurance contract will be available online, and an investor can choose to have that information delivered in paper or electronic format at no charge.

To implement the improved disclosure framework, the SEC adopted amendments to the registration forms and related rules for variable annuity and variable life insurance contracts. Variable annuities and variable life insurance contracts may begin using the modernized layered disclosure approach as early as July 1, 2020

For more information, click here .

Release No. 34-88216: Market Data Infrastructure

Summary - The SEC has published for public comment a proposal to modernize the infrastructure for the collection, consolidation, and dissemination of market data for exchange-listed national market system (NMS) stocks. The proposal would “update and expand the content of NMS market data to better meet the diverse needs of investors in today’s equity markets. The Commission has not significantly updated the rules that govern the content and dissemination of NMS market data since their initial implementation in the late 1970s. The proposal would also seek to introduce competitive forces into this core component of the national market system for the first time. The introduction of and competition among these new data consolidators could, in turn, allow all market participants, including investors, to access and benefit from the expanded content of NMS market data.”

This proposal is the latest initiative in the SEC’s ongoing efforts to modernize the national market system to better fit the needs of investors and other market participants, including our exchange listed, public companies. Comments on the proposal are due 60 days after publication in the Federal Register.

For more information, click here .

Release No. IC-33809: Request for Comments on Fund Names

Summary - The SEC has issued a request for public comment on its current requirements that restrict the use of potentially misleading fund names. The SEC indicates that fund names are “often the first piece of information investors see and they can have a significant impact on an investment decision.”

The request seeks feedback on whether the current requirements are effective and whether there are viable alternatives that the SEC should consider. The request is the latest in the SEC’s ongoing efforts to review and improve our existing rules to better inform and protect investors.

Comments are due by 60 days from publication in the Federal Register .

For more information, click here .

Audit Firms- SEC Publishes Statement on Continued Dialogue with Audit Firm Representatives on Audit Quality and Other Emerging Markets

Summary - The SEC has published a statement on the agencies continued dialogue with audit firm representatives on audit quality in China and other emerging markets. The statement indicates that the SEC expects to hold further meetings with other U.S. audit firms that, through use of their own networks or otherwise, audit U.S.-listed companies with significant operations in emerging markets, including China.

The statement also discusses guidance on financial reporting considerations related to the Coronavirus. The SEC indicated it has had recent dialogue with the senior leaders of the largest U.S. audit firms and discussed the “potential exposure of companies to the effects of the coronavirus and the impact that exposure could have on financial disclosures and audit quality, including, for example, audit firm access to information and company personnel. This remains a dynamic situation where the effects on any particular company may be difficult to assess or predict, because actual effects may depend on factors beyond the control and knowledge of issuers.”

For more information, click here .

Tax Updates

Self-Charged Interest Through Passthrough Entities

Written by Tabitha Ford, Tax Senior, MaloneBailey

Summary - Generally, portfolio income such as interest, dividends, annuities, and royalties are required to be taxed as ordinary income and cannot be used to offset passive losses, even if the income was derived from passthrough entities. Under sec. 469, passive losses can only be used to reduce passive income and not income from other sources such as portfolio interest; however, Sec. 1.469-7 provides an exception for this treatment of interest income if the lending activity is between a taxpayer and a passthrough entity in which the taxpayer owns a direct or indirect interest.

This regulation applies to interest income and expense that are recognized in the same tax year under one of three situations:

The taxpayer lends money to a passthrough entity (Partnership or S-Corp) in which it owns directly or indirectly a percentage of ownership
The passthrough entity makes a loan to a person that owns directly or indirectly an interest in the passthrough entity.
A loan is made between two passthrough entities where each of the entities’ owners have the same proportionate ownership interest in each entity.

Interest income sourced from any of the 3 situations listed above, as well as the associated interest expense, is known as self-charged interest income and expense. The exception allows the self-charged interest and expense to be recharacterized as passive activity income and deductions items. This treatment is generally favorable to the taxpayer; however, the passthrough entity has the ability to elect out of the recharacterization.

To determine if you have potential self-charged interest , please feel free to contact our Senior Tax Manager, Nicole Zhao .

Click here for more information.

Extra Crunch

Federal Relief for Taxpayers Affected by Ongoing COVID-19 Pandemic

Summary - On March 20, 2020 the IRS issued Notice 2020-18 regarding relief for taxpayers affected COVID-19. Here is a brief summary, as well as clarifications, on the relief:

Relief:

The due date for federal income tax returns due April 15, 2020 is automatically postponed to July 15, 2020;
The due date for making 2019 federal income tax payments due April 15, 2020 is automatically postponed to July 15, 2020;
The due date for making 2020 Q1 federal income tax payments due April 15, 2020 is automatically postponed to July 15, 2020;
There is no limitation on the amount of the federal income tax payment that may be postponed.

Clarifications:

The relief covered in this notice is solely for federal income tax return and payments due on April 15, 2020:

If you are a fiscal year-end taxpayer and if your federal income tax return is originally due between April 15 and July 15, your due date of federal income tax return and federal income tax payment are not postponed;
The due date for making 2020 Q2 federal income tax payments due June 15, 2020 is not postponed;
No extension is provided in this notice for the payment of any other type of federal tax (e.g. payroll taxes);
No extension is provided in this notice for the filing of any federal information return (e.g. form 941 employer’s quarterly federal tax return)
Some state tax payments and state tax return due dates have been postponed according to each state’s decision. Please see attachment for a list of state relief.

A payroll tax credit is available for businesses that incur Paid Sick Leave costs due to the COVID-19.

For more information on IRS Notice 2020-18, as well as a chart that details each state's tax filing and tax relief information, click here .

SEC Provides Conditional Regulatory Relief and Assistance for Companies Affected by the Coronavirus Disease 2019 (COVID-19)

Summary - Due to the challenges certain companies may face due to the ongoing coronavirus pandemic, the Securities and Exchange Commission is providing conditional regulatory relief to certain publicly traded company filing obligation under the federal securities law. U.S. companies located in affected areas and companies with operations in those regions may qualify for this relief.

The SEC issued a conditional order that provides publicly traded companies with a 45-day extension to file certain disclosure reports that would otherwise be due between March 1 and April 30, 2020. Among other conditions, companies must disclose through current reports and explanation of why this relief is necessary in their particular situation. The Commission may extend the time period for the relief, add conditions, or provide additional relief as circumstances warrant.

Companies and their representatives are encouraged to contact SEC staff with questions or concerns regarding this information.

For more information, click here .

About MaloneBailey, LLP

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

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