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

We are pleased to release MaloneBailey's August 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

The Importance of Mentorship

Recent Accounting & Regulatory Updates

Recent FASB & AICPA Updates

Request for Information - Post-Implementation Review of IFRS 15 Revenue from Contracts with Customers
Request for Information - Post-Implementation Review of IFRS 9 Financial Instruments Impairment
FASB Agenda –FASB Discusses Agenda Prioritization
Climate Matters –IFRS Foundation Publishes Educational Material on Climate Matters and Financial Statements
Tax Accounting –IASB Amends Tax Accounting Requirements to Help Companies Respond to International Tax Reform
OMB Compliance Supplement –OMB Issues 2023 Compliance Supplement
Supplier Finance Arrangements –IASB Adopts New Supplier Finance Disclosure Requirements
Credit Losses –IASB Begins Planned Review of Financial-Crisis-Era Reform to Loan-Loss Accounting
Publicly Traded Entities –AICPA Ethics Division Proposes Definitions Related to of Publicly Traded Entity and Public Interest Entities
Disclosure Improvements –FASB Discusses Proposed ASU on Disclosure Improvements
Revenue Recognition –IASB Seeks Input for Review of Accounting Standard on Revenue
QM Appendixes –AICPA Publishes Analysis Compares the ISQMs and SQMSs
SOC 1 Reports –AICPA Publishes Technical Question and Answer

Recent SEC & PCAOB Updates

Release No. 34-97877: Daily Computation of Customer and Broker-Dealer Reserve Requirements under the Broker-Dealer Customer Protection Rule
Release No. 34-97762: Reopening of Comment Period for Position Reporting of Large Security-Based Swap Positions
Release No. 34-97516: Covered Clearing Agency Resilience and Recovery and Wind-Down Plans
Release Nos. 33-11211: Money Market Fund Reforms; Form PF Reporting Requirements for Large Liquidity Fund Advisers; Technical Amendments to Form N-CSR and Form N-1A
Remarks at Financial Times Cyber Resilience Summit by Gurbir S. Grewal, Director, Division of Enforcement - June 2023
Exchange Act Rules –SEC Staff Updates Compliance and Disclosure Interpretation
Crypto Assets –PCAOB Issues Staff Report: Auditors Must Respond to Unique Risks of Crypto Assets, Including Fraud
Audit Committees –PCAOB Issues Spotlight for Audit Committees to Facilitate Dialogue on Risk of Fraud and Other Topics
Auditor Responsibilities –PCAOB Issues Proposal to Bring Greater Clarity to Certain Auditor Responsibilities When Using Technology-Assisted Analysis

Tax

Advanced Manufacturing Investment Credit

Extra Crunch

A Few Minutes with FINRA

About MaloneBailey, LLP

Featured Podcast

The Importance of Mentorship

Summary - We all need some guidance as we go about our day-to-day. It’s always helpful to know there’s someone you can turn to for guidance. At MaloneBailey, we like to emphasize the importance of mentorships and the positive work relationships and career growth these mentorships can offer. This month's podcast highlights the importance of mentorship and best practices for mentor/mentee relationships.

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

Request for Information - Post-Implementation Review of IFRS 15 Revenue from Contracts with Customers

Summary - The IASB has published a Request for Information: Post-Implementation Review of IFRS 15 Revenue from Contracts with Customers. This document seeks input from stakeholders to inform the IASB’s review of the IFRS accounting standard for revenue from contracts with customers, IFRS 15.

The accounting standard was developed jointly with the FASB and came into effect in 2018. It was created to improve the quality and comparability of revenue information provided to investors globally.

IFRS 15 introduced a comprehensive and robust framework for the recognition, measurement and disclosure of revenue that applies to a wide range of transactions and industries. The standard sets out a single coherent approach to recognizing and measuring revenue that provides useful information to investors about the nature, amount, timing and uncertainty of revenue and cash flows arising from a company’s contracts with customers.

Comments are requested by October 27, 2023.

For more information, click here.

Request for Information - Post-Implementation Review of IFRS 9 Financial Instruments Impairment

Summary -The IASB launched a call for stakeholders’ feedback on its post-implementation review of the expected credit loss requirements in IFRS 9 Financial Instruments.

IFRS 9 was developed in response to the global financial crisis, following calls from the G20 and other bodies for more timely recognition of loan losses and a forward-looking impairment model.

The ‘expected credit loss’ model in IFRS 9 replaced the previous ‘incurred credit loss’ model, which only allowed credit losses to be recognized when a loss event occurred. Under the incurred credit loss model, the effects of possible future credit loss events were not considered, even when they were expected.

The main objective of the requirements in IFRS 9 is to provide investors with more useful information about a company’s expected credit losses. The Accounting Standard requires a company to recognize and update expected credit losses throughout the life of a financial asset, factoring in the losses it expects based on relevant available information. Consequently, investors receive more timely information about expected credit losses.

Disclosures play an important part in providing investors with the information they need about expected credit losses. As a result, the IASB is also seeking stakeholder feedback on related disclosure requirements in IFRS 7 Financial Instruments: Disclosures in this post-implementation review.

The IASB conducts post-implementation reviews on all major new accounting requirements after companies have applied them for at least two years.

The review of IFRS 9 is being conducted in three parts. The first part, which covered the classification and measurement requirements, concluded in December 2022. The current review is the second part and covers the impairment requirements. The final part, which will cover hedge accounting, will be held at a later stage.

The Request for Information Post-implementation Review of IFRS 9 Financial Instruments―Impairment is open for comments until September 27, 2023.

For more information, click here.

FASB Agenda – FASB Discusses Agenda Prioritization

Summary - As reported in its “Summary of Decisions” publication, the FASB met on April 26, 2023, and discussed the Agenda Request on addressing whether certain convertible debt instruments settled using terms that differ from the stated contractual conversion provisions should be accounted for as induced conversion or extinguishment.

The FASB decided to add a project to the Emerging Issues Task Force (EITF) agenda to improve the relevance of the existing induced conversion guidance in Subtopic 470-20. The project scope will focus on the applicability of the induced conversion guidance to the early settlement of convertible debt instruments.

For more information, click here.

Climate Matters –IFRS Foundation Publishes Educational Material on Climate Matters and Financial Statements

Summary - The IFRS Foundation has published educational material to illustrate how the IFRS for SMEs Accounting Standard requires companies to consider climate-related matters that have a material effect on the financial statements.

The educational material, Effects of climate-related matters on financial statements prepared in accordance with the IFRS for SMEs Accounting Standard, was developed in response to feedback from some members of the SME Implementation Group and respondents to the 2022 Exposure Draft, Third edition of the IFRS for SMEs Accounting Standard. This feedback identifies that interest in the potential effects of climate-related matters on SMEs’ financial statements is growing among users of those statements.

The material provides a non-exhaustive list of examples of when companies may need to consider climate-related matters in their financial statements and is aimed at supporting the consistent application of the IFRS for SMEs Accounting Standard. It neither adds to nor changes the requirements in the IFRS for SMEs Accounting Standard. The material is based on similar educational material published by the IFRS Foundation to support full IFRS Accounting Standards.

For more information, click here.

Tax Accounting –IASB Amends Tax Accounting Requirements to Help Companies Respond to International Tax Reform

Summary - The IASB issued amendments to IAS 12 Income Taxes. The amendments give companies temporary relief from accounting for deferred taxes arising from the Organisation for Economic Co-operation and Development’s (OECD) international tax reform.

The OECD published the Pillar Two model rules in December 2021 to ensure that large multinational companies would be subject to a minimum 15% tax rate. More than 135 countries and jurisdictions representing more than 90% of global GDP have agreed to the Pillar Two model rules.

The IASB has taken urgent action to respond to stakeholders’ concerns about the uncertainty over the accounting for deferred taxes arising from the implementation of the rules.

The amendments will introduce:

A temporary exception to the accounting for deferred taxes arising from jurisdictions implementing the global tax rules. This will help to ensure consistency in the financial statements while easing into the implementation of the rules; and
Targeted disclosure requirements to help investors better understand a company’s exposure to income taxes arising from the reform, particularly before legislation implementing the rules is in effect.

Companies can benefit from the temporary exception immediately but are required to provide the disclosures to investors for annual reporting periods beginning on or after January 1, 2023.

For more information, click here.

OMB Compliance Supplement –OMB Issues 2023 Compliance Supplement

Summary - The White House Office of Management and Budget (OMB) today issued the 2023 Compliance Supplement.

This 2023 Supplement is effective for audits of fiscal years beginning after June 30, 2022, and supersedes the 2022 Compliance Supplement dated May 11, 2022.

The 2023 Compliance Supplement, like previous annual Compliance Supplements, identifies significant existing compliance requirements that the federal government expects to be considered as part of an audit required by the 1996 Amendments to the Single Audit Act. As with prior Compliance Supplements, it adds, deletes, and modifies prior Compliance Supplement sections.

In addition, the 2023 Compliance Supplement follows the OMB mandate adopted in the 2019 Compliance Supplement that requires each federal agency to limit the number of compliance requirements subject to the audit to six, with the exception of the Research and Development cluster.

The Research and Development cluster is permitted to identify seven compliance requirements as subject to the audit. For this purpose, the requirements relating to “A. Activities Allowed and Unallowed” and “B. Allowable Costs and Cost Principles” are treated as one requirement. The Part 2 matrix and the related program sections in parts 4 and 5 reflect the OMB’s six-requirement mandate. Additionally, the six-requirement mandate does not apply to programs not included in the annual Compliance Supplement.

Appendix V provides a list of changes from the 2022 Compliance Supplement. However, changes in the Matrix of Compliance Requirements are reflected in Part 2 of the 2023 Compliance Supplement.

For more information, click here.

Supplier Finance Arrangements –IASB Adopts New Supplier Finance Disclosure Requirements

Summary - The IASB issued disclosure requirements to enhance the transparency of supplier finance arrangements and their effects on a company’s liabilities, cash flows and exposure to liquidity risk. The disclosure requirements are the IASB’s response to investors’ concerns that some companies’ supplier finance arrangements are not sufficiently visible, hindering investors’ analysis.

The amendments supplement requirements already in IFRS Accounting Standards and require a company to disclose:

The terms and conditions;
The amount of the liabilities that are part of the arrangements, breaking out the amounts for which the suppliers have already received payment from the finance providers, and stating where the liabilities sit on the balance sheet;
Ranges of payment due dates; and
Liquidity risk information.

The amendments, which affect IAS 7 Statement of Cash Flows, and IFRS 7 Financial Instruments: Disclosures, will become effective for annual reporting periods beginning on or after January 1, 2024.

For more information, click here.

Credit Losses –IASB Begins Planned Review of Financial-Crisis-Era Reform to Loan-Loss Accounting

Summary - The IASB launched a call for stakeholders’ feedback on its post-implementation review of the expected credit loss requirements in IFRS 9 Financial Instruments.

IFRS 9 was developed in response to the global financial crisis, following calls from the G20 and other bodies for more timely recognition of loan losses and a forward-looking impairment model.

The IASB conducts post-implementation reviews on all major new accounting requirements after companies have applied them for at least two years.

The Request for Information Post-implementation Review of IFRS 9 Financial Instruments―Impairment is open for comments until September 27, 2023.

For more information, click here.

Publicly Traded Entities –AICPA Ethics Division Proposes Definitions Related to of Publicly Traded Entity and Public Interest Entities

Summary - The AICPA Professional Ethics Executive Committee (PEEC) has issued the Exposure Draft, Proposed New Definition of Publicly Traded Entity and Revised Definition of Public Interest Entity (ET sec. 0.400).

The PEEC is proposing the new and revised definitions under its project to converge the AICPA Code of Professional Conduct with the standards of the International Ethics Standards Board for Accountants (IESBA). Last year, the IESBA amended its definitions of listed entity and public interest entity (PIE). Recently, the IESBA staff released a questions and answers (Q&As) publication on the revisions to these definitions as well as a Database of Public Interest Entity (PIE) Definitions, organized by jurisdiction, that it believes will further support the adoption and effective implementation of the 2022 revisions.

The IESBA revisions include within PIEs several mandatory categories, including publicly traded entities, entities one of the main functions of which is to take deposits from the public, and entities one of the main functions of which is to provide insurance to the public, as well as certain other entities specified by law or regulation. The proposed PEEC definitions include some but not all of the IESBA categories.

Publicly Traded Entity (ET sec. 0.400.45)

The PEEC Exposure Draft provides that a publicly traded entity includes “[a]n entity that issues financial instruments that are transferable and traded through a publicly accessible market mechanism, including through listing on a stock exchange.” As noted in the Explanation, if adopted as proposed, this would also include “financial instruments of certain nonissuers, such as governmental bonds, as well as certain entities listed on OTC trading platforms.”

Public Interest Entity (ET sec. 0.400.43)

The Exposure Draft revises the PEEC definition of public interest entity to include entities that fall within any of the following categories:

A publicly traded entity whose auditor is subject to the SEC issuer independence rules;
An entity wherein one of the main functions of which is to take deposits from the public and that has consolidated total assets of $1 billion or more as of the beginning of the fiscal year;
An entity wherein one of the main functions of which is to provide insurance to the public that is subject to the National Association of Insurance Commissioners Annual Financial Reporting Model Regulation (Model Audit Rule) and that has $500 million in annual direct written and assumed premiums; and
An investment company, other than an insurance company product, that is registered with the SEC pursuant to the Investment Company Act of 1940.

Comment Deadline and Effective Date

The comment deadline for the proposal definitions is September 15, 2023. The “PEEC recommends that the proposed revisions be effective for periods beginning on or after December 15, 2024, with early implementation allowed” to align with the effective date of similar changes by the IESBA.

For more information, click here.

Disclosure Improvements –FASB Discusses Proposed ASU on Disclosure Improvements

Summary - As reported in Summary of Decisions, the FASB met on May 17, 2023 and redeliberated the proposed Accounting Standards Update (ASU), Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. The FASB affirmed a number of decisions on disclosures related to various accounting topics, including changes in reporting entity, earnings per share, and assets subject to liens. These decisions are detailed in the summary.

For more information, click here.

Revenue Recognition –IASB Seeks Input for Review of Accounting Standard on Revenue

Comments are requested by October 27, 2023.

For more information, click here.

QM Appendixes – AICPA Publishes Analysis Compares the ISQMs and SQMSs

Summary - The AICPA has published QM Appendix: Substantial Differences between the ISQMs and the SQMSs. This analysis was prepared by the AICPA Audit and Attest Standards staff to highlight substantive differences between the International Standards on Quality Management (ISQMs) and the Statements on Quality Management Standards (SQMSs) codified in QM sections 10-20, and the rationale therefore.

For more information, click here.

SOC 1 Reports – AICPA Publishes Technical Question and Answer

Summary - The AICPA has published Technical Question and Answer Section 9560: Information About Controls Over Cryptographic Keys in a SOC 1® Report. TQAs provide nonauthoritative guidance in question and answer format provided by the AICPA on various topics. As explained in a Note introducing the specific paragraphs, TQA Section 9560 “addresses the inclusion of information about controls over cryptographic keys in management’s description of a service organization’s system in a SOC 1 report.

For more information, click here.

Recent SEC & PCAOB Updates

Release No. 34-97877: Daily Computation of Customer and Broker-Dealer Reserve Requirements under the Broker-Dealer Customer Protection Rule

Summary -The SEC proposed amendments to Rule 15c3-3 (Customer Protection Rule) to require certain broker-dealers to increase the frequency with which they perform computations of the net cash they owe to customers and other broker-dealers (known as PAB account holders) from weekly to daily. Net cash owed to customers and PAB account holders must be held in a special reserve bank account.

The SEC indicates that broker-dealers occasionally may have substantial deposit requirements as a result of customer and PAB reserve computations. The proposal would “require broker-dealers with average total credits (the amount of cash they owe customers and PAB account holders) equal to or greater than $250 million to make the computations necessary to determine the amounts required to be deposited in the customer and PAB reserve bank accounts daily, as of the close of the previous business day. By reducing the timeframe between computations, the proposal would assist broker-dealers in more dynamically matching the net amount of cash owed to customers and PAB account holders with the amount on deposit in the broker-dealer’s customer and PAB reserve bank accounts. The daily customer and PAB reserve computations would safeguard customers and PAB account holders by lessening the potential for large mismatches to build over time, thereby increasing the likelihood that they are made whole even if a broker-dealer fails.”

The public comment period will remain open for 60 days following publication of the proposing release on the SEC website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.

For more information, click here.

Release No. 34-97762: Reopening of Comment Period for Position Reporting of Large Security-Based Swap Positions

Summary -The SEC reopened the comment period for its proposed rule for position reporting of large security-based swap positions that exceed certain thresholds, and the staff of the SEC’s Division of Economic and Risk Analysis released a memorandum that provides supplemental data and analysis regarding the proposed reporting thresholds in the equity security-based swap market.

The public comment period will remain open until August 21, 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 Nos. 33-11211: Money Market Fund Reforms; Form PF Reporting Requirements for Large Liquidity Fund Advisers; Technical Amendments to Form N-CSR and Form N-1A

Summary - The SEC has adopted amendments to certain rules that govern money market funds under the Investment Company Act of 1940.

The SEC indicates that the amendments will “increase minimum liquidity requirements for money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions.” The amendments also remove provisions in the current rule that permit a money market fund to suspend redemptions temporarily through a gate and allow money market funds to impose liquidity fees if their weekly liquid assets fall below a certain threshold. These changes are designed to reduce the risk of investor runs on money market funds during periods of market stress.

To address concerns about redemption costs and liquidity, the amendments will require institutional prime and institutional tax-exempt money market funds to impose liquidity fees when a fund experiences daily net redemptions that exceed 5 percent of net assets, unless the fund’s liquidity costs are de minimis. In addition, the amendments will require any non-government money market fund to impose a discretionary liquidity fee if the board determines that a fee is in the best interest of the fund. The SEC indicates that these amendments are designed to protect remaining shareholders from dilution and to more fairly allocate costs so that redeeming shareholders bear the costs of redeeming from the fund when liquidity in underlying short-term funding markets is costly.

The amendments also modify certain reporting forms that are applicable to money market funds and large private liquidity funds advisers.

The rule amendments will become effective 60 days after publication in the Federal Register with a tiered transition period for funds to comply with the amendments. The reporting form amendments will become effective June 11, 2024.

For more information, click here.

Remarks at Financial Times Cyber Resilience Summit by Gurbir S. Grewal, Director, Division of Enforcement - June 2023

Summary - Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, recently discussed cybersecurity and its role in our public securities markets. Grewal indicates that cybersecurity is foundational to maintaining the integrity of our public securities markets and the economy as a whole.

Grewal notes that the SEC “is doing its part here to address these risks. In addition to enforcing existing rules and requirements, as everyone in this room well knows, the Commission has also proposed and is considering rules enhancing cybersecurity-related policies and procedures at broker-dealers, exchanges, and other market participants.”

The SEC’s Division of Enforcement follows five principles to guide its work aimed at ensuring companies take their cybersecurity and disclosure obligations seriously. These principles are:

When there are cyber-attacks on publicly traded companies and other market participants, we consider the investing public to also be potential victims of those incidents.
Companies need to have real policies that work in the real world, and then they need to actually implement them; having generic “check the box” cybersecurity policies simply doesn’t cut it.
Companies need to regularly review and update all relevant cybersecurity policies to keep up with constantly evolving threats. What worked 12 months ago probably isn’t going to work today, or at a minimum may be less effective.
When a cyber incident does happen, the right information must be reported up the chain to those making disclosure decisions. If they don’t get the right information, it doesn’t matter how robust your disclosure policies are.
The SEC has zero tolerance for gamesmanship around the disclosure decision. Grewal urges companies that have a material event, or think they might, to comply with their disclosure obligations and come and talk to the SEC sooner rather than later, not in six months after they finish their internal investigation.

For more information, click here.

Exchange Act Rules –SEC Staff Updates Compliance and Disclosure Interpretation

Summary - The staff in the SEC’s Division of Corporation Finance (Corp Fin) has updated its Compliance and Disclosure Interpretation, Exchange Act Rules. Corp Fin has added new questions 120.26-120.28. These new questions provide guidance related to the implementation of the SEC’s new Final Rule, Insider Trading Arrangements and Related Disclosures.

Among other things, this new rule provides affirmative defenses to trading on the basis of material nonpublic information in insider trading cases and includes new disclosure requirements under Regulation S-K and revisions to Rule 16a-3 and Forms 4 and 5.

For more information, click here.

Crypto Assets –PCAOB Issues Staff Report: Auditors Must Respond to Unique Risks of Crypto Assets, Including Fraud

Summary - The PCAOB released a new Spotlight staff report, "Inspection Observations Related to Public Company Audits Involving Crypto Assets," based primarily on observations gathered during 2021 and 2022 inspections. The staff report says that the use of crypto assets presents unique audit risks to public companies and broker-dealers and requires an appropriate risk assessment and audit response by audit firms.

Since 2017, PCAOB inspectors have been reviewing audits of public companies where transactions or holdings associated with crypto assets were material to the financial statements. In its 2023 inspections, the PCAOB is continuing to prioritize risks related to material digital assets.

As detailed in the staff report, PCAOB inspections have identified common audit deficiencies related to crypto assets in the auditor’s procedures for the following areas:

Fraud and significant unusual transactions.
Ownership of crypto assets.
Relevance and reliability of information used as audit evidence.
Revenue recognition in crypto asset transfer.
Arrangements with mining pool operators.

In addition to inspection observations, the staff report discusses good practices that some audit firms have implemented that may enhance audit quality, including the following:

Consultations – Engagement teams at some firms are encouraged to consult with the members of the firm’s professional practice group and/or subject-matter specialists related to crypto assets.
Subject-matter specialists – Certain firms have established centralized groups related to distributed ledger technology (e.g., cryptography, blockchain technology).
Technology-based tools – To support public company audits involving crypto assets, some firms have developed proprietary, technology-based tools.

The staff report also presents reminders for auditors regarding execution of their responsibilities in areas such as client acceptance and retention evaluation, information technology infrastructure, consideration of fraud, and critical audit matters.

For more information, click here.

Audit Committees –PCAOB Issues Spotlight for Audit Committees to Facilitate Dialogue on Risk of Fraud and Other Topics

Summary - The PCAOB released a new Spotlight staff report, “Staff Resource for Audit Committees,” which suggests questions that may be of interest to audit committee members to consider among themselves or in discussions with their independent auditors, particularly given today’s economic and geopolitical landscape.

Investors and other stakeholders look to audit committees of public companies to oversee the quality and sufficiency of the accounting and financial reporting processes of public companies, as well as the audits of public companies. Effective execution of the audit committee’s responsibilities is especially important, given higher audit deficiency rates that the PCAOB staff has observed recently – and the consequent need for audit firms to sharpen their focus on increasing audit quality.

As part of their responsibilities, it is important that audit committees engage in effective two-way communication with auditors and ask relevant questions throughout the audit. The Spotlight suggests questions that audit committees may want to consider regarding the auditor’s work on the following topics:

Risk of fraud;
Risk assessment and internal controls;
Auditing and accounting risks;
Digital assets;
Merger and acquisition activities;
Use of the work of other auditors;
Talent and its impact on audit quality;
Independence;
Critical audit matters; and
Cybersecurity

For more information, click here.

Auditor Responsibilities – PCAOB Issues Proposal to Bring Greater Clarity to Certain Auditor Responsibilities When Using Technology-Assisted Analysis

Summary - The PCAOB issued a proposal for public comment designed to improve audit quality and enhance investor protection by addressing aspects of designing and performing audit procedures that involve technology-assisted analysis of information in electronic form. The proposal includes changes to AS 1105, Audit Evidence, and AS 2301, The Auditor’s Responses to the Risks of Material Misstatement and conforming amendments to other related PCAOB auditing standards.

Existing PCAOB standards relating to audit evidence and responses to risk were issued by the PCAOB in 2010. Since that time, companies have greatly expanded their use of information systems that maintain large volumes of information in electronic form. As a result, auditors have greater access to large volumes of company-produced and third-party information in electronic form that may potentially serve as audit evidence. Some auditors have greatly expanded their use of data analysis tools.

Although the PCAOB staff’s research indicates auditors are using technology-assisted analysis in audit procedures, it also indicates that audit quality would benefit if the standards included additional direction addressing specific aspects of designing and performing audit procedures that involve technology-assisted analysis.

The proposal seeks to improve audit quality by reducing the likelihood that an auditor who uses technology-assisted analysis will issue an opinion without obtaining sufficient appropriate audit evidence. In particular, the proposal would bring greater clarity to auditor responsibilities in the following areas:

Using reliable information in audit procedures – Technology-assisted analysis often involves analyzing vast amounts of information in electronic format. The proposal would emphasize auditor responsibilities when evaluating the reliability of such information. For example, when auditors test a company’s controls over electronic information, their testing should include controls over the company’s information technology related to such information.
Using audit evidence for multiple purposes – Technology-assisted analysis can be used to provide audit evidence for various purposes in an audit, such as performing risk assessment procedures when planning an audit and performing substantive procedures in response to the auditor’s risk assessment. The proposal would specify that if an auditor uses audit evidence from an audit procedure for more than one purpose, the auditor should design and perform the procedure to achieve each of the relevant objectives.
Designing and performing substantive procedures –When designing and performing substantive procedures, auditors can use technology-assisted analysis to identify transactions and balances that meet certain criteria and warrant further investigation. For example, auditors can identify all transactions within an account processed by a certain individual or exceeding a certain amount. The proposal would clarify factors the auditor should consider as part of that investigation, including whether the identified items represent a misstatement or a control deficiency or indicate a need for the auditor to modify its risk assessment or planned procedures.

The deadline for public comment on the proposal is August 28, 2023.

For more information, click here.

Tax

Advanced Manufacturing Investment Credit

By Travis Moffett, Tax Manager

On August 9, 2022 the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS Act) was signed into law. The CHIPS Act is designed to boost US competitiveness, innovation and national security. One of the credits established by the CHIPS Act is the advanced semiconductor manufacturing investment credit. Let’s dive into the background of and key benefits to claiming the AMIC.

Background

Internal Revenue Code Section 48D allows eligible taxpayers to claim the AMIC, which equals 25% of the basis of any qualified property that is part of the taxpayer’s advance semiconductor manufacturing facility if the property is placed in service after December 31, 2022 and before January 1, 2027. For those that qualify, a taxpayer may elect to treat the AMIC as a payment of federal income tax equal to the amount of the credit, instead of as a credit against the federal income tax liability (elective payment election). The elective payment election also allows a partnership or S corporation to receive a payment instead of a tax credit for property held directly by a partnership or S corporation.

Qualified Property

Qualified property can be defined as the following:

Tangible property that may be depreciated (or amortized in lieu of depreciation) and is “constructed, reconstructed, or erected by the taxpayer, or…acquired by the taxpayer if the original use of such property commences with the taxpayer”.
Integral to the operation of the advanced manufacturing facility, of which primary purpose is semiconductor manufacturing.
A building satisfying the requirements of IRC Section 48D(b)(2)(A) (including the building’s structural components).
Property constructed by the taxpayer or on the taxpayer’s behalf.

Qualified property does not include buildings or portions of buildings that are not used for semiconductor manufacturing or buildings used for administrative services.

Beginning of Construction

Proposed regulations specify that a taxpayer can establish that construction of a property has begun by meeting the Physical Work Test or the Five Percent Safe Harbor. Whether the beginning of construction requirement is satisfied is determined based on the date construction of that property began. Also, the proposed regulations explain that a taxpayer must meet the Continuity Requirement to establish the beginning of construction. Thus, a taxpayer must demonstrate that either continuous construction or continuous efforts have occurred.

Final Thoughts

The American Manufacturing Investment Credit serves as a valuable tax incentive for semiconductor manufacturers, promoting investment in qualified property and equipment. By leveraging this credit, semiconductor manufacturers can experience substantial tax savings while upgrading their semiconductor manufacturing capabilities, enhancing competitiveness, and driving economic growth. To take full advantage of this program, businesses should consult with their tax advisors and adhere to the eligibility requirements.

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

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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