June 2023: Latest SEC, FASB & Tax Updates from the SEC, IRS, Etc.

We are pleased to release MaloneBailey's June 2023 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 Podcast

We LOVE Houston: Living & Working in the Nation's Fourth Largest City

Recent Accounting & Regulatory Updates

Recent FASB & AICPA Updates

Methodology for Enhancing the International Applicability of the SASB Standards and SASB Standards Taxonomy Updates
Sustainability –ISSB Seeks Feedback on Priorities
SASB Standards –ISSB Publishes Exposure Draft on Methodology for Enhancing the International Applicability of the SASB® Standards and SASB Standards Taxonomy Updates

Recent SEC & PCAOB Updates

Release No. 33-11180: Reopening of Comment Period for Modernization of Beneficial Ownership Reporting
Release No. 34-97309: Supplemental Information and Reopening of Comment Period for Amendments to Exchange Act Rule 3b-16 Regarding the Definition of “Exchange”
Release No. 34-97424: Share Repurchase Disclosure Modernization
Release No. IA-6297: Amendments to Form PF to Require Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers and to Amend Reporting Requirements for Large Private Equity Fund Advisers
Staff Statement on the Holding Foreign Companies Accountable Act and the Consolidated Appropriations Act, 2023
PCAOB Inspections –PCAOB 2023 Inspections to Prioritize Audit Risks Related to Fraud, the Financial Services Sector, and Crypto
Professional Competence and Skepticism –PCAOB Publishes Spotlight

Tax

Elective Pass-Through Entity Tax

Extra Crunch

New York Stock Exchange: The Leaderboard

About MaloneBailey, LLP

Featured Podcast

We LOVE Houston: Living & Working in the Nation's Fourth Largest City

Summary - Our featured podcast pays homage to our hometown, the great, the fabulous, H-Town – Houston, Texas! The topic is We LOVE Houston! We do! It’s a multicultural, cosmopolitan city abound with great restaurants, a bustling nightlife, major sports teams, a world renowned medical center and a fabulous sense of culture with museums, entertainment events, historical areas and more!

We are talking about Houston because we regularly have prospective employees considering a move to Houston for the job. So, it’s important to us that they have a solid understanding of all that Houston has to offer not just for one’s professional life, but even more importantly, for their personal life.

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

Methodology for Enhancing the International Applicability of the SASB Standards and SASB Standards Taxonomy Updates

Summary -The ISSB has issued for public comment an Exposure Draft, Methodology for Enhancing the International Applicability of the SASB® Standards and SASB Standards Taxonomy Updates. This proposal sets out the methodology proposed by the ISSB for amending SASB Standards metrics to enhance their international applicability. This Exposure Draft also includes the proposed approach for updating the digital SASB Standards Taxonomy to reflect amendments made to the SASB Standards.

Comments are requested by August 9, 2023.

For more information, click here.

Sustainability – ISSB Seeks Feedback on Priorities

Summary - The International Sustainability Standards Board (ISSB) is seeking feedback on its priorities for its next two-year work plan. The Request for Information Consultation on Agenda Priorities is open for comments until September 1, 2023.

Based on research into the information needs of investors, the ISSB has identified four potential projects:

Biodiversity, ecosystems and ecosystem services;
Human capital; and
Human rights
Researching integration in reporting.

For more information, click here.

SASB Standards –ISSB Publishes Exposure Draft on Methodology for Enhancing the International Applicability of the SASB® Standards and SASB Standards Taxonomy Updates

Summary - The ISSB has issued for public comment an Exposure Draft, Methodology for Enhancing the International Applicability of the SASB® Standards and SASB Standards Taxonomy Updates. This proposal sets out the methodology proposed by the ISSB for amending SASB Standards metrics to enhance their international applicability. This Exposure Draft also includes the proposed approach for updating the digital SASB Standards Taxonomy to reflect amendments made to the SASB Standards. Comments are requested by August 9, 2023.

For more information, click here.

Recent SEC & PCAOB Updates

Release No. 33-11180: Reopening of Comment Period for Modernization of Beneficial Ownership Reporting

Summary -The SEC has reopened the comment period for its proposed amendments to modernize the rules governing beneficial ownership reporting, and the staff of the SEC’s Division of Economic and Risk Analysis released a memorandum that provides supplemental data and analysis related to the proposed amendments’ economic effects.

The public comment period will remain open until June 27, 2023, or until 30 days after the date of publication of the reopening release in the Federal Register, whichever is later.

For more information, click here.

Release No. 34-97309: Supplemental Information and Reopening of Comment Period for Amendments to Exchange Act Rule 3b-16 Regarding the Definition of “Exchange”

Summary - The SEC has reopened the comment period and provided supplemental information on proposed amendments to the definition of “exchange” under Exchange Act Rule 3b-16. The SEC initially proposed the amendments in January 2022 and reopened the comment period in May 2022. The reopened comment period closed on June 13, 2022.

The SEC’s reopening release reiterated the applicability of existing rules to platforms that trade crypto asset securities, including so-called “DeFi” systems, and provides supplemental information and economic analysis for systems that would be included in the new, proposed exchange definition. The reopening release also requested information and public comment on crypto asset securities trading on such systems and certain aspects of the proposed amendments applicable to all securities.

The public comment period will remain open for 30 days after publication of the reopening release in the Federal Register

For more information, click here.

Release No. 34-97424: Share Repurchase Disclosure Modernization

Summary - The SEC adopted amendments to modernize the disclosure requirements relating to repurchases of an issuer’s equity securities, including requiring issuers to provide daily repurchase activity on a quarterly or semi-annual basis, depending on the type of issuer. The SEC indicates that the amendments will “improve disclosure and provide investors with enhanced information to assess the purposes and effects of share repurchases.”

Amendments

The amendments will require issuers to disclose daily quantitative share repurchase information either quarterly or semi-annually. The required disclosures include, for each day on which a repurchase was conducted, the number of shares repurchased that day and the average price paid, among other things. Issuers will also be required to include a checkbox indicating whether certain officers and directors traded in the relevant securities in the four business days before or after the announcement of the repurchase plan or program.

Further, the amendments will revise and expand narrative repurchase disclosure requirements to require that an issuer disclose:

The objectives or rationales for its share repurchases and the process or criteria used to determine the amount of repurchases; and
Any policies and procedures relating to purchases and sales of the issuer’s securities during a repurchase program by its officers and directors, including any restriction on such transactions.

In addition, the amendments will add a new item to Regulation S-K to better allow investors, the SEC, and other market participants to observe how issuers use Rule 10b5-1 plans. New Item 408(d) will require quarterly disclosure in periodic reports on Forms 10-Q and 10-K about an issuer’s adoption and termination of Rule 10b5-1 trading arrangements.

Effective Date

Foreign private issuers that file on foreign private issuer forms will disclose the quantitative data in new Form F-SR beginning with the Form F-SR that covers the first full fiscal quarter that begins on or after April 1, 2024, and provide the narrative disclosure starting in the first Form 20-F filed after their first Form F-SR has been filed. Registered closed-end management investment companies that are exchange traded will disclose the quantitative data and provide the narrative disclosure on Form N-CSR beginning with the Form N-CSR that covers the first six-month period that begins on or after January 1, 2024. All other issuers will be required to include the quantitative data as an exhibit to their Forms 10-Q and 10-K and provide the narrative disclosure in their Forms 10-Q and 10-K beginning with the first filing that covers the first full fiscal quarter that begins on or after October 1, 2023.

For more information, click here.

Release No. IA-6297: Amendments to Form PF to Require Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers and to Amend Reporting Requirements for Large Private Equity Fund Advisers

Summary - The SEC adopted amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds. The amendments are designed to enhance the ability of the Financial Stability Oversight Council (FSOC) to assess systemic risk and to bolster the SEC’s oversight of private fund advisers and its investor protection efforts. The SEC indicates that the amendments will “require large hedge fund advisers and all private equity fund advisers to file current reports upon the occurrence of certain reporting events that could indicate significant stress at a fund or investor harm.” Reporting events for large hedge fund advisers include certain:

Extraordinary investment losses;
Significant margin and default events;
Terminations or material restrictions of prime broker relationships;
Operations events; and
Events associated with withdrawals and redemptions.

Large hedge fund advisers must file these reports as soon as practicable, but not later than 72 hours from the occurrence of the relevant event. Reporting events for private equity fund advisers include the removal of a general partner, certain fund termination events, and the occurrence of an adviser-led secondary transaction. Private equity fund advisers must file these reports on a quarterly basis within 60 days of the fiscal quarter end.

The amendments will also require large private equity fund advisers to report information on general partner and limited partner clawbacks on an annual basis as well as additional information on their strategies and borrowings as a part of their annual filing.

The amendments for current reporting will become effective six months after publication of the adopting release in the Federal Register, and the remaining amendments will become effective one year after publication in the Federal Register

For more information, click here.

Staff Statement on the Holding Foreign Companies Accountable Act and the Consolidated Appropriations Act, 2023

Summary - The staff in the SEC’s Division of Corporation Finance and Division of Trading and Markets has published Staff Statement on the Holding Foreign Companies Accountable Act and the Consolidated Appropriations Act, 2023. This statement provides SEC staff guidance on the amendments to the Holding Foreign Companies Accountable Act that shorten the timeframe before certain issuers face a trading prohibition from three to two consecutive years, and to clarify that any foreign authority impeding PCAOB inspections or investigations can trigger the provisions of the legislation.

For more information, click here.

PCAOB Inspections –PCAOB 2023 Inspections to Prioritize Audit Risks Related to Fraud, the Financial Services Sector, and Crypto

Summary - The PCAOB inspectors outlined their priorities for 2023 inspections in a new PCAOB staff report. The report outlines plans to increase the focus on fraud-related audit procedures, continue prioritizing risks related to material digital assets, and continue selecting audits in the financial services sector for inspection, among other priorities.

The complete list of 2023 inspection priorities outlined in the report includes:

Risk of fraud;
Auditing and accounting risks;
Risk assessment and internal controls;
Financial services specific considerations;
Broker-dealer specific considerations;
M&A, including de-SPAC transactions;
Digital assets;
Use of the work of other auditors;
Quality control (particularly talent retention and its impact on audit quality, and independence); and
Other inspection areas (critical audit matters, cybersecurity, and use of data and technology in the audit).

The report notes inspectors will focus their work in 2023 on audits that include risks related to digital assets, first year audits, multi-location audits, and significant or unusual events or transactions. As part of ongoing efforts to enhance inspections, the report also says inspectors will expand the number of audits they review for certain annual firms.

For more information, click here.

Professional Competence and Skepticism –PCAOB Publishes Spotlight

Summary - The PCAOB has published Spotlight: Professional Competence and Skepticism Are Essential to Quality Audits. Periodically, the staff of the PCAOB provides reminders to auditors on applying specific PCAOB requirements, including relevant examples. PCAOB staff reminds auditors of the importance of critically assessing the firm’s capabilities, obtaining proper understanding of the company they are auditing, and performing work with due professional care and professional skepticism. These matters are particularly important in circumstances where changes to economic conditions or other factors affect the company.

For more information, click here.

Tax

Elective Pass-Through Entity Tax

By Travis Moffett, Tax Manager

With the enactment of the Tax Cuts and Jobs Act of 2017, there was a $10,000 cap on the deduction of state and local taxes (SALT) for individuals beginning with the 2018 tax year. In response to this, some states have enacted an optional pass-through entity tax as a workaround to the cap. This election allows passthrough entities to deduct state taxes at the entity level on their federal income tax returns, while providing a credit or income exclusion to the entity owners for state income tax purposes.

What is the Elective PTE Tax?

Owners of pass-through entities are typically responsible for paying the taxes on the entity’s taxable income. This election allows pass-through entities to pay state income taxes on the owners’ behalf. PTE tax is calculated based on tax rates determined at the entity level regardless of the individual partners’ effective state tax rates. The payments of these taxes are fully deductible by the entity for federal income tax purposes and are passed through to the owners’ form 1040 Schedule E. Regarding the PTE owners’ state tax calculations, some states, such as Louisiana and Wisconsin, allow the owners of PTEs to obtain an income exclusion for the amount of pass-through income that has been taxed at the pass-through entity level. While other states allow a dollar-for-dollar state tax credit on the K-1 in the amount of state taxes paid by the PTE.

Please note that PTE tax is different from composite tax, which only covers non-resident PTE owners.

Things to consider before making an election:

Along with making the election to be taxed at the entity level come issues that should be addressed before making such an election including:

Legal and accounting costs of making the election.
Determining whether some owners might benefit disproportionately from others.
Tax consequences to PTE owners for their resident state where the credit for their share of taxes paid to another state is not allowed.
The aggregate additional state tax burdens might exceed the federal tax savings.
The election should be evaluated on a year-to-year basis as a number of states continue to amend their original workarounds.

These are just some of the things to consider which could ultimately make the election undesirable. Especially for large, multi-state entities, the workaround may provide tax savings for some members while also increasing the tax burden for other owners leading to an unintended result.

Key Takeaways

Pass-through entities must exercise care when considering whether to make the optional election to make sure that all members will benefit. This can be done by performing detailed analyses of all the risks and opportunities involved on an ongoing basis to ensure that the owners are benefiting by having their state tax liabilities reduced. We recommend that clients consult their tax advisors to come to a solution that would benefit all parties involved.

For additional information, please contact Nicole Zhao, Tax Partner, at nzhao@malonebailey.com.