We are pleased to release MaloneBailey's September 2019 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
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Featured Podcast

  • The Impact of Technology on the Audit Function

Accounting and Regulatory Updates

Recent FASB Updates

  • FASB Accounting Standards Updates - No. 2019-07 —Codification Updates to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous 
  • FASB Accounting Standards Updates - No. 2019-06 —Intangibles —Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958): Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities 
  • Financial Instruments – FASB Proposes Clarification to the Interaction between the Recognition and Measurement of Financial Instruments and the Accounting for Equity Method Investments

Recent SEC Updates

  • SEC Staff Speech, Statement at the SEC Staff Roundtable on Short-Term / Long-Term Management of Public Companies, Our Periodic Reporting System and Regulatory Requirements by Chairman Jay Clayton
  • SEC Staff Speech, Statement on Opportunity Zones by Chairman Jay Clayton
  • Release No. 33-10668: Modernization of Regulation S-K Items 101, 103, and 105 
  • Release No. 34-86304: Customer Margin Rules Relating to Security Futures 

Tax Updates

  • Section 267A Deduction Disallowance

Extra Crunch

  • Accounting Policy Disclosures – IASB Proposes Improvements to Accounting Policy Disclosures 
  • Auditing Standards Board – July 22-25, 2019 Meeting Minutes Published 
  • Codification Improvements – FASB Discusses Codification Improvements for Share-Based Consideration Payable to Customers 
  • Segment Reporting – FASB Discusses Segment Reporting and Other Matters 
  • IFRS for SMEs – IFRS Draft Q&A on the IFRS for SMEs Standard Published for Public Comment 
  • Materiality – AICPA Proposes Amendments to Materiality Standards 
  • Independence – PCAOB Issues Staff Guidance on Audit Committee Communications Related to Independence 

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Featured Podcast
Our featured podcast for September 2019 highlights an important discussion on the evolution and impact of technology in the audit space. Technology is central to our approach at MaloneBailey. Tune in to hear audit partners Jimmy Thompson and Steven Vertucci discuss this key and ever-changing component of the audit process.

Please click on the image below to listen.
Recent FASB Updates & Proposals
FASB Accounting Standards Updates - No. 2019-07 —Codification Updates to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous 

Summary - The FASB has issued Accounting Standards Update (ASU) No. 2019-07, Codification Updates to SEC Sections . ASU 2019-07 amends certain SEC sections or paragraphs within the FASB Accounting Standards Codification™ (Codification). These amendments are being made to reflect the following previously issued SEC final rules:
•                  Disclosure Update and Simplification ; and
•                  Investment Company Reporting Modernization (2 final rules).

The SEC adopted the above final rules to improve, update, and simplify its regulations on financial reporting and disclosure. ASU 2019-07 updates the Codification to reflect these SEC changes. Other miscellaneous updates are included in ASU 2019-07 to update language in the Codification to the electronic Code of Federal Regulations.

For more information, click here .

© 2019 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
FASB Accounting Standards Updates - No. 2019-06 —Intangibles —Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958): Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities 

Summary - The FASB has issued Accounting Standards Update (ASU) No. 2019-06, Intangibles—Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958): Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities (NFPs). This ASU is intended to reduce the cost of accounting for goodwill and measuring certain identifiable intangible assets for not-for-profit organizations.

History
In 2014, the Private Company Council (PCC) worked with the FASB to issue two private company alternatives on accounting for goodwill and accounting for identifiable intangible assets in a business combination. Stakeholders told the FASB that these two private company alternatives would also benefit not-for-profit organizations.

ASU No. 2019-06
This ASU extends the scope of the two private company alternatives to not-for-profits, enabling organizations to recognize fewer items as separate intangible assets in acquisitions and to account for goodwill in a more cost-effective manner.
In ASU No. 2019-06, instead of testing goodwill for impairment annually at the reporting unit level, a not-for-profit organization that elects the accounting alternative will:
•                  Amortize goodwill over 10 years or less, on a straight-line basis;
•                  Test for impairment upon a triggering event; and
•                  Have the option to elect to test for impairment at the entity level.

A not-for-profit organization also has the option to subsume certain customer-related intangible assets and all noncompete agreements into goodwill, which it subsequently must amortize.

Effective Date
The standard is effective immediately.

For more information, click here .

© 2019 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Financial Instruments – FASB Proposes Clarification to the Interaction between the Recognition and Measurement of Financial Instruments and the Accounting for Equity Method Investments

Summary -  The FASB issued a proposed Accounting Standards Update (ASU) that would clarify the interaction between the accounting standard on recognition and measurement of financial instruments and the accounting standard on equity method investments. Stakeholders are asked to review and provide comment on the proposed ASU, which is based on a consensus of the FASB’s Emerging Issues Task Force (EITF), by August 29, 2019.

In 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which added Topic 321 , Investments—Equity Securities , and made targeted improvements to address certain aspects of accounting for financial instruments. One of those improvements provided a company with the ability to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs (the measurement alternative).

The proposed ASU results from stakeholder questions about the interaction of Topic 321 and Topic 323, Investments—Equity Method and Joint Ventures , and would clarify that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323 for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The proposed ASU also provides guidance on questions received about how to apply the guidance in Topic 815, Derivatives and Hedging , for certain forward contracts and purchased options to purchase securities that, upon settlement or exercise, would be accounted for under the equity method of accounting. These proposed amendments would reduce diversity in practice and increase comparability of the accounting for these interactions. 

For more information, click here .

© 2019 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Recent SEC Updates & Proposals
SEC Staff Speech, Statement at the SEC Staff Roundtable on Short-Term / Long-Term Management of Public Companies, Our Periodic Reporting System and Regulatory Requirements by Chairman Jay Clayton

Summary - SEC Chairman Jay Clayton recently issued a statement in connection with the SEC’s Division of Corporation Finance (Corp Fin) roundtable held on July 18, 2019 to hear from investors, issuers, and other market participants about the impact of short-termism on our capital markets and whether our reporting system, or other aspects of the SEC’s regulations, should be modified to address these concerns.

Two panel discussions were held that focused on:
  • Impact of a Short-Term Focus on Our Capital Markets; and
  • Our Periodic Reporting System’s Role in Fostering a Long-Term.

For more information, click here .

© 2019 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
SEC Staff Speech, Statement on Opportunity Zones by Chairman Jay Clayton

Summary - SEC Chairman Jay Clayton recently released a statement in connection with the SEC’s and the North American Securities Administrators Association’s (NASAA’s) release of a summary that “explains the application of the federal and state securities laws to opportunity zone investments.” The opportunity zone program was established by the Tax Cuts and Jobs Act in December 2017 to provide tax incentives for long-term investing in designated economically distressed communities.

The summary is intended to help participants in the opportunity zone program understand the compliance implications for qualified opportunity funds under federal and state securities laws. Among other things, the summary discusses:

  • The opportunity zone program;
  • When interests in qualified opportunity funds would be securities under federal and state securities laws; and
  • SEC and state requirements relating to qualified opportunity funds and their securities offerings, broker-dealer registration, and considerations for advisers to a qualified opportunity fund.

Formed in 1919, NASAA is the non-profit association of state, provincial, and territorial securities regulators in the United States, Canada and Mexico.

For more information, click here .

© 2019 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Release No. 33-10668: Modernization of Regulation S-K Items 101, 103, and 105 

Summary - The SEC proposed amendments to modernize the description of business (Item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105) that registrants are required to make pursuant to Regulation S-K. The SEC is proposing amendments to these items to “improve these disclosures for investors and to simplify compliance for registrants. More specifically, the proposed amendments are intended to improve the readability of disclosure documents, as well as discourage repetition and disclosure of information that is not material.”

Proposed Amendments to Item 101
The proposed amendment of Item 101(c) would:
  • Clarify and expand its principles-based approach, by including disclosure topics drawn from a subset of the topics currently contained in Item 101(c);
  • Include, as a disclosure topic, human capital resources, including any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the registrant’s business, such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the attraction, development, and retention of personnel; and
  • Refocus the regulatory compliance requirement by including material government regulations, not just environmental provisions, as a topic.

Proposed Amendments to Item 103
The proposed amendment of Item 103 would:
  • Expressly state that the required information about material legal proceedings may be provided by including hyperlinks or cross-references to legal proceedings disclosure located elsewhere in the document in an effort to encourage registrants to avoid duplicative disclosure; and
  • Revise the $100,000 threshold for disclosure of environmental proceedings to which the government is a party to $300,000 to adjust for inflation.

Proposed Amendments to Item 105
The proposed amendment of Item 105 would:
  • Require summary risk factor disclosure if the risk factor section exceeds 15 pages;
  • Refine the principles-based approach of that rule by changing the disclosure standard from the “most significant” factors to the “material” factors required to be disclosed; and
  • Require risk factors to be organized under relevant headings, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate caption.

The proposal will have a 60-day public comment period following its publication in the Federal Register .

For more information, click here .

© 2019 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Release No. 34-86304: Customer Margin Rules Relating to Security Futures 

Summary - The SEC has issued for public comment a proposed rule, Customer Margin Rules Relating to Security Futures . The Commodity Futures Trading Commission (“CFTC”) and the SEC (collectively, the “Commissions”) are proposing amendments to regulations that establish minimum customer margin requirements for security futures. More specifically, the proposed amendments would lower the margin requirement for an unhedged security futures position from 20% to 15%, as well as propose certain revisions to the margin offset table consistent with the proposed reduction in margin.

Comments are due 30 days from publication in the Federal Register .

For more information, click here .

© 2019 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Tax Updates
Section 267A Deduction Disallowance
 
If you have reviewed your 2018 corporation or partnership tax return, you should have seen the following question:
 
During the tax year, did the corporation (or partnership) pay or accrue any interest or royalty for which the deduction is not allowed under section 267A?

Upon reviewing this question, it's likely that the first thing that comes to mind is: what is Section 267A ?
 
Section 267A is a new code section that was introduced as law as part of the 2017 Tax Reform. It disallows the deduction for any disqualified related party amount paid or accrued under certain circumstances. When a U.S. taxpayer pays or accrues any interest or royalty to a foreign related party, if, under the law of that foreign country, such amount is not considered as an income of the related party, or if such related party is allowed a deduction with respect to such amount, then such interest or royalty is a disqualified related party amount and cannot be deducted on the U.S. taxpayer’s tax return. The reason for this disallowance of deduction is the tax mismatching in a group’s worldwide structure.

For example, A is a U.S. corporation and a wholly owned subsidiary of B, a corporation incorporated in foreign country X. Under the law of country X, A is a disregarded entity of B. A borrows money from B and pays an interest payment of $50,000 in 2018. Under the law of country X, the intercompany loan and interest are disregarded; the above $50,000 interest paid to B is not treated as an income of B. According to Section 267A, A is not allowed to deduct such payment on its U.S. income tax return.
 
There are other code sections, such as Section 267, which might limit the deduction of expenses incurred in intercompany transactions.

If you have any questions, please don’t hesitate to contact Nicole Zhao at nzhao@malonebailey.com.
Extra Crunch
Accounting Policy Disclosures – IASB Proposes Improvements to Accounting Policy Disclosures  

Summary - The IASB has published for public comment proposed narrow-scope amendments to IAS 1 , Presentation of Financial Statements , and IFRS Practice Statement 2, Making Materiality Judgements , to help companies provide useful accounting policy disclosures to users of financial statements.

IAS 1 requires companies to disclose their “significant” accounting policies. The IASB is proposing to replace the reference to “significant” with a requirement to disclose “material” accounting policies to clarify the threshold for disclosing information.

The proposals state that information about an accounting policy is material if, when considered together with other information included in a company’s financial statements, it can influence financial statement users’ decisions about the company.

The IASB is also proposing to add guidance to IAS 1 to help companies understand what makes an accounting policy material and to update IFRS Practice Statement 2 by adding further explanations and examples to help companies apply the concept of materiality in making decisions about accounting policy disclosures.

The IASB is asking stakeholders to comment on the proposed amendments and is particularly interested in comments on whether the examples proposed for inclusion in the Practice Statement are helpful.
The comment period on the proposal is open for comment until November 29, 2019.

For more information, please click here .

© 2019 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Auditing Standards Board – July 22-25, 2019 Meeting Minutes Published  

The Auditing Standards Board met on July 22-25, 2019 and has published minutes from this meeting. Topics discussed include:
  • Estimates;
  • Conforming amendments;
  • Attestation standards; and
  • Other matters.

For more information, please click here .

© 2019 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Codification Improvements – FASB Discusses Codification Improvements for Share-Based Consideration Payable to Customers  

As reported in its “Summary of Board Decisions” publication, the FASB met on July 31, 2019. The FASB discussed comments received on its March 2019 proposed Accounting Standards Update, Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements—Share-Based Consideration Payable to a Customer .

The FASB’s discussion focused on the following topics:
  • Redeliberation issues;
  • Transition and effective date;
  • Analysis of costs and benefits; and
  • Next steps.

For more information, please click here .

© 2019 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Segment Reporting – FASB Discusses Segment Reporting and Other Matters  

As reported in its “Summary of Board Decisions” publication, the FASB met on July 23, 2019.

The FASB held educational sessions on the following topics:
  • Segment reporting;
  • Primary financial statements/financial performance reporting;
  • Financial instruments with characteristics of equity/distinguishing liabilities from equity;
  • IBOR reform/reference rate reform;
  • Goodwill and impairment/identifiable intangible assets and subsequent accounting for goodwill;
  • Disclosure initiative/disclosure framework;
  • Implementation of the revenue (Topic 606, IFRS 15) and leases (Topic 842, IFRS 16) standards; and
  • The FASB’s project on effective date consideration for private companies, not-for-profit organizations, and small public companies.

No decisions were made.

For more information, please click here .

© 2019 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
IFRS for SMEs – IFRS Draft Q&A on the IFRS for SMEs Standard Published for Public Comment 

The IFRS Foundation is calling on stakeholders to comment on its draft Q&A on the application of the IFRS for SMEs® Standard.

The draft Q&A responds to a question from stakeholders about the application of the undue cost or effort exemption for investment property on the date of transition to the IFRS for SMEs Standard. The draft Q&A concludes that additional cost or effort due to the elapse of time between the date of transition and the date of preparing the first IFRS for SMEs financial statements is not considered.

The draft Q&A has been developed by the SME Implementation Group (SMEIG), which assists the IASB in supporting the application of the IFRS for SMEs Standard. Developing non-mandatory and timely guidance on applying the IFRS for SMEs Standard is one of the two main responsibilities of the SMEIG. The group also advises the IASB on amendments to the IFRS for SMEs Standard.

During the 2019 Comprehensive Review of the IFRS for SMEs Standard, the IASB will consider the guidance developed by the SMEIG since the issue of the 2015 amendments to the IFRS for SMEs Standard and decide whether to incorporate the responses in the IFRS for SMEs Standard.

The draft Q&A is the second to be published since the initial comprehensive review of the IFRS for SMEs Standard, completed in May 2015.

The consultation is open for comment until October 7, 2019.

For more information, please click here .

© 2019 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Materiality – AICPA Proposes Amendments to Materiality Standards  

The AICPA’s Auditing Standards Board (ASB) has issued an exposure draft of a proposed Statement on Auditing Standards (SAS) anda proposed Statement on Standards for Attestation Engagements (SSAE), Amendments to the Description of the Concept of Materiality. Both exposure drafts are included in the same document and have the same title. Comments are due by August 5, 2019.

Materiality Definitions
The proposals, if adopted as proposed, would amend various AU-C and AT-C sections in AICPA Professional Standards . They would align the materiality concepts of the AICPA Professional Standards with the definition of materiality used by the U.S. judicial system and the PCAOB, SEC and FASB. The current ASB materiality standard is consistent with those of the International Accounting Standards Board (IASB) and the International Auditing and Assurance Standards Board (IAASB).

The ASB believes that eliminating inconsistencies between the AICPA standards and the definition of materiality used by the U.S. judicial system and other U.S. standard-setters and regulators would be in the public interest.

The current ASB, IASB and IAASB standards provide that “misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements” (emphasis added by the AICPA in the exposure draft Background section).

In contrast, the definition used by the U.S. judicial system, standard-setters and SEC provides that “an omission or misstatement” is material “if there is a substantial likelihood that a reasonable person would consider it important” (emphasis added by the AICPA in the exposure draft Background section).

Affected Auditing and Attestation Standards
Under the proposal, the definition of materiality would provide that: “Misstatements, including omissions, are considered to be material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment of a reasonable user made based on the financial statements.” The focus of the revised definition would be on whether the misstatement would have a “substantial likelihood” that it “would influence the judgment” of a reasonable user.

The proposed revisions would modify the following auditing standards:
  • SAS 122, Statements on Auditing Standards: Clarification and Recodification, as amended;
  • SAS No. 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements; and
  • SAS No. 13X, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA. The AICPA expects to issue SAS 13X in the third quarter of this year.

The proposed amendments would amend the following sections of SSAE No. 18, Attestation Standards: Clarification and Recodification :
  • AT-C section 205, Examination Engagements; and
  • AT-C section 210, Review Engagements.

Proposed Effective Dates
The ASB expects that the effective date for the proposed SAS and SSAE amendments will be for audits of financial statements for periods ending on or after December 15, 2020 or practitioners’ reports dated on or after December 15, 2020, respectively. It is possible that the proposed effective date may change, but the ASB has advised that the amendments will not be effective earlier than December 15, 2020. 

For more information, please click here .

© 2019 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Independence – PCAOB Issues Staff Guidance on Audit Committee Communications Related to Independence  

The Public Company Accounting Oversight Board (PCAOB) has published a new staff guidance document, Rule 3526(b) Communications with Audit Committees Concerning Independence . In addition, the PCAOB has issued a companion document, Overview of Staff Guidance of Audit Committee Communications Related to Independence.

The new Staff Guidance provides assistance to practitioners concerning how to comply with certain provisions of PCAOB Rule 3526, Communication with Audit Committees Concerning Independence . It includes background on Rule 3526 and technical guidance for auditors on the independence-related communications required by the rule when an auditor has identified one or more violations of applicable auditor independence rules. The Overview provides a one-page summary of the Staff Guidance.

Rule 3526(b) Requirements
Under PCAOB Rule 3526(b), auditors must at least annually provide audit committee members with sufficient information to understand how a relationship between the auditor and the audit client might affect the auditor’s independence. Specifically, the audit firms must:
  • Provide a written description of all relationships between the firm and all relationships between it or any affiliates and the audit client or persons in financial reporting oversight roles at the audit client may reasonably be thought to bear on independence;
  • Discuss with the audit committee of the audit client the potential effects of the relationships;
  • Affirm to the audit committee the firm’s compliance with PCAOB Rule 3520,Auditor Independence(Rule 3520); and
  • Document the substance of its discussion with the audit committee of the audit client.

PCAOB inspections staff have observed independence violations in some situations in which firms have affirmed their independence but have also identified one or more violations of applicable auditor independence rules. These situations have occurred in situations where auditors have ( a ) addressed the underlying reasons for the violation, ( b ) the firm communicated the matter to the audit committee, ( c ) the audit committee separately evaluated the firm’s determination; and ( d ) the audit committee and the firm agreed to continue the audit engagement.

Staff Questions & Answers
The guidance includes five Staff Questions & Answers that:
  • Provide detailed information on how firms should conduct its annual communications when the firm described the above-described fact patterns;
  • Answers “no” on the issue of whether, when a violation is addressed by the date of communication, the audit firm may simply affirm to the audit committee of the audit client that the firm is independent, rather than provide the communications set out in the first question;
  • Advise that a firm’s communication of all the required elements and analysis that objectivity and impartiality have not been impaired does not “cure” the independence violation in Rule 3520;
  • Advise that the firm need not include prior-year violations that were previously addressed properly in its communications in the current year; and
  • Indicate that when the audit firm has followed the processes described in the Staff Guidance, it is not required to alter the language in the auditor’s report for purposes of the new auditor’s reporting requirements in PCAOB Auditing Standard 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. 

For more information, please click here .

© 2019 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
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