We are pleased to release MaloneBailey's November 2021 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 SECFASB 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
What's the Crunch?

Featured Podcast

  • Navigating the Uplisting Process to Nasdaq

Recent Accounting & Regulatory Updates

Recent FASB & AICPA Updates

  • Exposure Draft - Proposed Accounting Standards Update 2021-005 —Fair Value (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions 
  • Leases –FASB Discusses Proposed Guidance on Discount Rates for Lessees 
  • Independence –AICPA’s Ethics Board Proposes New Independence Interpretation
  • FASB Agenda –FASB Discusses Agenda Prioritization 
  • Unpaid Fees –AICPA’s PEEC Proposes Revisions to Unpaid Fees Interpretation 
  • Note Disclosures –GASB Publishes Fact Sheet on Note Disclosures
  • Financial Instruments –IASB Seeks Views on IFRS 9 Review

Recent SEC Updates

  • Release No. 34-93169: Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers 
  • SEC Staff Views: October 1, 2021: Sample Letter to Companies Regarding Climate Change Disclosures
  • SEC Staff Views: Remarks Before the Alternative Reference Rates Committee’s SOFR Symposium, Gary Gensler, Chairman - September, 2021

Tax Updates

  • Taxpayers to Watch Out for Net Operating Loss and Business Loss limitations Starting in 2021

Extra Crunch

  • A Few Minutes with FINRA

About MaloneBailey, LLP


Featured Podcast
Navigating the Uplisting Process to Nasdaq

Summary - In this episode of Everybody Counts, Caroline Rosen, Marketing and Communications Manager, speaks with Andy Hall from Nasdaq who shares his insightful perspectives on the uplisting process, criteria and how to navigate common challenges. This podcast is one of a three-part series with podcasts that also cover uplisting to NYSE and ungrading to OTC Markets.

For these podcasts and many more, please visit the Resources section of the MaloneBailey website.

Simply click on the image below to listen to the podcast. For this podcast and many more, please visit the Resources section of our website.
Recent FASB & AICPA Updates
Exposure Draft - Proposed Accounting Standards Update 2021-005 —Fair Value (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions

Summary - The FASB issued a proposed Accounting Standards Update (ASU) that would improve financial reporting for investors and other financial statement users by increasing comparability of financial information across reporting entities that have investments in equity securities measured at fair value that are subject to contractual restrictions preventing the sale of those securities. Stakeholders are encouraged to review and provide comment on the proposed ASU by November 14, 2021.

Topic 820, Fair Value Measurement, states that when measuring the fair value of an asset or a liability, a reporting entity should consider the characteristics of the asset or liability, including restrictions on the sale of the asset or liability, if a market participant also would take those characteristics into account. Key to that determination is the unit of account for the asset or liability being measured at fair value.

Some stakeholders noted that Topic 820 contains conflicting guidance on what the unit of account is when measuring the fair value of an equity security. This has resulted in diversity in practice on whether the effects of a contractual restriction that prohibits the sale of an equity security should be considered in measuring that equity security’s fair value.

To address this, the amendments in the proposed ASU would clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.

For more information, click here.

© 2021 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Leases –FASB Discusses Proposed Guidance on Discount Rates for Lessees

Summary - As reported in its “Summary of Board Decisions” publication, the FASB met on September 15, 2021 and completed its redeliberations on proposed Accounting Standards Update (ASU), Leases (Topic 842): Discount Rate for Lessees That Are Not Public Business Entities, and made a number of decisions, including:

  • Allow a lessee that is not a public business entity to make the risk-free discount rate accounting policy election by class of underlying asset;
  • Require a lessee to disclose its election, including the asset class to which it has made the accounting policy election;
  • Retain a risk-free rate for the discount rate accounting policy election, rather than another specified rate, such as a corporate bond rate or the prime rate;
  • Require a lessee that is not a public business entity to use the rate implicit in the lease when it is readily determinable instead of the risk-free rate, regardless of whether the lessee applies the risk-free rate election;
  • For a lessee that is not a public business entity that has not adopted Topic 842 as of the issuance of a final ASU, the FASB decided that the transition and effective date provisions in paragraph 842-10-65-1 should apply; and 
  • For a lessee that is not a public business entity that has adopted Topic 842 as of the issuance of a final ASU, the FASB decided to require disclosure of the amount of the transition adjustment to lease liabilities and right-of-use assets as of the beginning of the year of adoption. 

For more information, click here.

© 2021 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Independence –AICPA’s Ethics Board Proposes New Independence Interpretation

Summary - The AICPA's Professional Ethics Executive Committee (PEEC) has issued the exposure draft, Accounting Standards Implementation Services (Exposure Draft), and an accompanying invitation to comment, on a new independence interpretation. The comment deadline is December 20, 2021.

Purpose of New Interpretation
In response to the increased complexity of accounting standards, PEEC is seeking to provide guidance on how independence could be affected when a member assists an attest client with implementing new or existing accounting standards.

Although, as the PEEC noted, there is existing guidance on auditor independence, the proposed interpretation would combine “key elements from extant nonattest services guidance (for example, advisory, information systems services, and internal audit)….” The PEEC believes that the combination of these elements “will further foster understanding and, therefore, compliance with independence requirements.”

The specific elements of the guidance that practitioners should keep in mind when performing nonattest services include:
  • Not performing any management responsibilities; and
  • Making sure that the person overseeing the nonattest service is able to oversee the service and make “all significant judgments and decisions.”

If adopted as final, the interpretation will be in ET section 1.295.113 of the AICPA Code of Professional Conduct (Code) and will be applicable to members in public practice.

Effective Date
PEEC recommends that the interpretation be effective 90 days after it appears in the Journal of Accountancy. 
 
For more information, click here.

© 2021 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
FASB Agenda –FASB Discusses Agenda Prioritization

Summary - As reported in its “Summary of Board Decisions” publication, the FASB met on September 22, 2021. During this meeting, the FASB staff provided an update on outstanding agenda requests. Additionally, the FASB discussed the results of staff research and analysis on three potential projects related to recent agenda requests.

The FASB decided to add a project to the Emerging Issues Task Force agenda to expand the proportional amortization method to investments in tax credits other than low income housing tax credit (LIHTC) investments. Additionally, the FASB decided that the current scope of the project will be to evaluate whether the current criteria for an investment to be accounted for using the proportional amortization method are operable for investments in tax credit structures other than LIHTC structures.

The FASB decided not to add the following potential projects to its agenda:
  • Embedded derivatives: equity-indexed annuities and modified coinsurance arrangements; and
  • Annuitization benefits: certain discount rate changes in other comprehensive income. 

For more information, click here.

© 2021 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Unpaid Fees –AICPA’s PEEC Proposes Revisions to Unpaid Fees Interpretation

Summary - The AICPA’s Professional Ethics Executive Committee (PEEC) has issued the Exposure Draft, Proposed Revised Interpretation, Unpaid Fees, as well as an Invitation to Comment. The comment deadline is December 20, 2021.

Principles-Based Framework
The proposal revises the “Unpaid Fees” interpretation that has a “bright line” one-year provision with a “principles-based framework.” The extant interpretation provides guidance on when unpaid fees impair independence. Under the proposal, the member is required to determine whether unpaid fees create a threat to independence and whether those threats are at an acceptable level. If those threats are not at an acceptable level, the member is to determine whether safeguards can reduce them to such a level. If not, the “member should discontinue the engagement until such time as threats can be so reduced.”

Contents of the Proposal
The proposed revisions:
  • Remove references to an advocacy threat, which does not apply to unpaid fees;
  • Provide the principles-based framework to evaluate the possible impairment of independence;
  • Include factors to consider in evaluating whether threats to independence are acceptable; and
  • Include examples of safeguards to eliminate or reduce threats to independence.

If adopted as proposed, the revised material will be in ET section 1.230.010 of the AICPA Code of Professional Conduct (Ethics Code) and will apply to members in public practice. Effective DateThe PEEC has recommended that these proposed amendments become effective six months after publication of notice in the Journal of Accountancy, with early adoption permitted.

For more information, click here.

© 2021 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Note Disclosures – GASB Publishes Fact Sheet on Note Disclosures

Summary - The Governmental Accounting Standards Board (GASB) has published its Fact Sheet on the Proposed Note Disclosure Concepts Statement (Fact Sheet). This Fact Sheet includes information on the proposed Note Disclosure Concepts Statement titled Revised Exposure Draft, Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements - Notes to Financial Statements — an amendment of GASB Concepts Statement No. 3. The GASB issued the Revised Exposure Draft in July 2021. The purpose of the revised proposal is to guide the GASB when establishing note disclosure requirements for state and local governments. The proposed concepts primarily are intended to provide the GASB with criteria to consistently evaluate notes to financial statements in the standards-setting process. The Revised Exposure Draft would establish that notes to financial statements are essential to making economic, social, or political decisions or assessing accountability. They also may help stakeholders to understand the fundamental concepts underlying future GASB pronouncements.

The proposed concepts include, for example:
  • The purpose of notes to financial statements;
  • The intended users of note disclosures;
  • The types of information that should be disclosed in notes; and
  • The types of information that are not appropriate for note disclosures.

The Fact Sheet explains these concepts in more detail but also makes clear that if the proposal becomes a Concepts Statement, “no changes would be made to any note disclosures without the GASB engaging fully in its due process activities. . . .”

The Fact Sheet provides information on significant issues related to the proposal, including, among others: 
  • The overall purposes of Concepts Statements;
  • The criteria the GASB is proposing for notes, the target audience for notes, the criteria for determining whether information is essential, and the types of information that are and are not appropriate for notes;
  • The effect the proposal would have, if adopted, on the purpose of notes;
  • The criteria the GASB believes are essential for users;
  • The types of criteria the GASB will require governments to disclose in its notes, assuming information meets the criteria for essentiality; and
  • The changes in information the GASB is proposing to make in what is and is not appropriate for disclosure in notes.

For more information, click here.

© 2021 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Financial Instruments –IASB Seeks Views on IFRS 9 Review

Summary - The International Accounting Standards Board (IASB) is requesting feedback as part of the post-implementation review of the classification and measurement requirements of International Financial Reporting Standard (IFRS) 9, Financial Instruments. It has issued the Request for Information, Post-implementation Review of IFRS 9—Classification and Measurement. Responses are due by January 28, 2022.

The IASB issued the completed version of IFRS 9 in 2014, combining the classification and measurement, impairment, and hedge accounting phases of its project to replace and improve on IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 specifies how a company is required to classify and measure financial assets and financial liabilities as well as some contracts to buy or sell non-financial items. IFRS 9 has been in effect since 2018.

The Request for Information seeks information on the classification and measurement requirements in IFRS 9 and related disclosures. The IASB will review the impairment and hedge accounting requirements of IFRS 9 later.

The IASB undertakes a post-implementation review of each new IFRS Standard or major amendment after companies have applied it for at least two years. These reviews offer the IASB the opportunity to assess the effect of the new requirements on companies, investors, auditors and regulators.
After analyzing feedback from these reviews, the IASB decides whether to take any further actions. These actions can include providing educational materials or doing more research for possible standard-setting. At the end of its analysis, the IASB summarizes and explains its responses to the feedback. 

For more information, click here.

© 2021 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Recent SEC Updates
Release No. 34-93169: Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers

Summary - The Securities and Exchange Commission has proposed amendments to Form N-PX to enhance the information mutual funds, exchange-traded funds, and certain other funds report about their proxy votes. The proposed rulemaking would require funds to tie the description of each voting matter to the issuer’s form of proxy and to categorize each matter by type to help investors identify votes of interest and compare voting records. The proposal also would prescribe how funds organize their reports and require them to use a structured data language to make the filings easier to analyze. Funds would also be required to disclose how their securities lending activity impacted their voting.

Further, the rulemaking would require institutional investment managers to disclose how they voted on executive compensation, or so-called “say-on-pay” matters, which would fulfill one of the remaining rulemaking mandates under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Managers generally would be subject to the same Form N-PX reporting requirements as funds with respect to their say-on-pay votes.

Since 2003, funds have been required to file Form N-PX reports disclosing how they voted on proxy proposals relating to investments they hold, but investors may face difficulties analyzing these reports. For example, funds may report their votes in an inconsistent manner or in a format that is not machine readable. This can make it more difficult for investors to analyze the reported data. The proposal would make funds’ proxy voting records more usable and easier to analyze, improving investors’ ability to monitor how their funds vote and compare different funds’ voting records.

The proposal will be published on SEC.gov and in the Federal Register. The public comment period will remain open for 60 days after publication in the Federal Register.

For more information, click here.

© 2021 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
SEC Staff Views: October 1, 2021: Sample Letter to Companies Regarding Climate Change Disclosures

Summary - The staff in the SEC’s Division of Corporation Finance (Corp Fin) has published a Sample Letter to Companies Regarding Climate Change Disclosures. This letter provides views of the Corp Fin staff, indicating that the “letter contains sample comments that the Division may issue to companies regarding their climate-related disclosure or the absence of such disclosure. The sample comments do not constitute an exhaustive list of the issues that companies should consider. Any comments issued would be appropriately tailored to the specific company and industry, and would take into consideration the disclosure that a company has provided in Commission filings.”

The letter reminds companies that SEC disclosure rules may require disclosure related to climate change. Companies also must disclose, in addition to the information expressly required by SEC regulation, “such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.”

For more information, click here.

© 2021 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
SEC Staff Views: Remarks Before the Alternative Reference Rates Committee’s SOFR Symposium, Gary Gensler, Chairman - September, 2021

Summary - SEC Chair Gary Gensler recently spoke about the transition from LIBOR. Gensler cautioned that “as we transition away from LIBOR, I want to be sure our replacement rates are appropriately clothed. To that end, I have several concerns about one rate that a number of commercial banks are advocating as a replacement for LIBOR. This rate is called the Bloomberg Short-Term Bank Yield Index (BSBY). I believe BSBY has many of the same flaws as LIBOR. Both benchmarks are based upon unsecured, term, bank-to-bank lending.” Gensler went on to indicate that he agrees “with the ARRC that the Secured Overnight Financing Rate (SOFR), which is based on a nearly trillion-dollar market, is a preferable alternative rate.”

For more information, click here.

© 2021 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Tax Updates
Taxpayers to Watch Out for Net Operating Loss and Business Loss Limitations Starting in 2021

Written by Chuqiao Peng, Tax Senior, MaloneBailey, LLP

Starting in 2021, taxpayers may not be able to fully offset their taxable income using their net operating Loss (NOL) carryover and excess business losses due to the expiration of several favorable tax rules under the CAREs Act. Thus, it is critical for taxpayers to understand their 2021 estimated tax liabilities under the new rules by the 2021 Q4 estimated tax deadline.

Changes on NOL Limitations
A NOL occurs when a corporation or individual has more allowable tax deductions than gross income within a tax period. The NOL can be carried forward to future tax years to reduce the taxpayer’s future tax burden. Before the Tax Cuts and Jobs Act (TCJA) enacted in 2017, NOLs were fully deductible and could be carried back for 2 years and carried forward for 20 years. The TCJA made significant changes to the NOL rules by:

1. Limiting the deductions of NOL generated after December 31,2017 to 80% of taxable income;
2. Disallowing NOL carrybacks; and,
3. Allowing NOL carryforward indefinitely.

The CARES Act signed into law on March 27, 2020 temporarily suspends the 80% of taxable income limitation and provides a special 5-year carryback for taxable years beginning in 2018, 2019 and 2020 with exceptions applied to certain farming losses and NOLs of insurance companies other than a life insurance company.

In 2021, the unfavorable NOL limitation was back in effect. The amount of an NOL deduction is now equal to the aggregate amount of the NOLs arising in tax years beginning before January 1, 2018, carried to current tax year, plus the lesser of (1) the aggregate amount of NOLs arising in tax years beginning after December 31, 2017, carried to such tax year; or (2) 80% of the excess of taxable income computed without regard to the NOL deduction and the Secs. 199A (qualified business income) and 250 (foreign-derived intangible income and global intangible low-taxed income) deductions.

For example, Corporation A has NOL carryforward of $10k in 2017, $20k in 2018, $50k in 2019 and 20k in 2020, respectively. A has waived the carrybacks on all NOLs. In 2021, A has taxable income of 30k.
Since the 80% of taxable income limit is back after December 31, 2020, A can first apply all 2017 NOL carryforward and reduce the taxable income by $10k. Next, A can deduct the lesser of (1) the total NOLs incurred after December 31, 2017, or $90k ($20k+$50k+$20k); or (2) 80% of the taxable income, which is $24k ($30k * 80%). Since the $24k is less than the 90K, the maximum NOL deduction in 2021 is $34k ($10k from 2017 and $24k from 80% of taxable income).
 
Changes on Excess Business Loss Limitation
An excess business loss is the amount by which the total deductions attributable to all of your trade or business exceed your total gross income and gains attributable to those trades or businesses. It is generally used by individual taxpayers to offset their nonbusiness income. Before the TCJA, an individual taxpayer’s business losses could usually be fully deducted in the tax year they arose.

However, the TCJA placed a $250k limitation (or $500k in the case of a joint return) on excess business loss that can be used to offset nonbusiness income for tax years beginning after December 31, 2017 and ending before January 1, 2026. Both amounts of limitations are subject to annual inflation. Under this rule, any disallowed excess business losses were carried over as an NOL.

The CAREs Act repealed such limitation for tax years 2018, 2019 and 2020. But starting in 2021, the limitation on excess business loss is back in effect. After annually adjusted inflation, the amount of limitation is $262k (or $524k for joint returns) for 2021. Noted that the CARES Act also made several adjustments to the computation of the excess business loss that will apply beginning in 2021, such as treating wage income as nonbusiness income.

For example, Tom is a single taxpayer who has $500k of gross income and $850k of deductions from a nonpassive retail business in 2021, resulting in $350k excess business loss. However, because of the $262k limitation on excess business loss on single taxpayer, Tom can only use $262K excess business loss to offset his other nonbusiness income (such as salary) and must treat $88k ($850k-$500k-$262k) as NOL carryforward to 2022.
 
Considering the changes on NOL and business loss limitations starting 2021, we suggest that taxpayers calculate 2021 estimated tax before the Q4 estimated tax due date of December 15, 2021 for C corporations and January 18, 2022 for individuals.

If you need any assistance in calculating your 2021 income tax, please feel free to contact Nicole Zhao, Tax Partner.

Extra Crunch
A Few Minutes with FINRA

Summary - FINRA provides a library of brief video segments in which senior FINRA staff discuss timely regulatory topics and respond to comments from firms on specific areas of concern.

These videos are available on the FINRA website. The topics are diverse and offer different perspectives on topics regarding accounting regulations.

For more information, please click here.

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