We are pleased to release MaloneBailey's November 2022 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

• Taxpayers to Watch Out for Net Operating Loss and Business Loss Limitations

Recent Accounting & Regulatory Updates



Recent FASB & AICPA Updates

• Joint Ventures –FASB Discusses Joint Venture Formations 
• Business Combinations –AICPA Publishes Working draft of Business Combinations Accounting and Valuation Guide
• Sale and Leaseback Transactions –IASB Issues Narrow-Scope Amendments for Sale and Leaseback Transactions  
• Employee Benefit Plans –New Edition of AICPA Employee Benefit Plans: Best Practices in Presentation and Disclosure Published & State and Local Governments –New Editions of AICPA Audit and Accounting Guide Published  
• Information System Services –AICPA Issues New TQAs on Information Systems Services 
• Income Statement –FASB Discusses Disaggregation of Income Statement Expenses
• Leases –FASB Discusses Common Control Arrangements  

Recent SEC & PCAOB Updates

• Release No. 34-95763: Standards for Covered Clearing Agencies for U.S. Treasury Securities and Application of the Broker-Dealer Customer Protection Rule With Respect to U.S. Treasury Securities 
• Release No. 34-96034: Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants
• Release No. 33-11101: Adoption of Updated EDGAR Filer Manual
• Release No. 33-11098: Inflation Adjustments under Titles I and III of the JOBS Act
• The Auditor’s Responsibility for Fraud Detection, Paul Munter, Acting Chief Accountant, Office of the Chief Accountant
• PCAOB Interim Attestation Standards –PCAOB Staff Requests Information and Comment on Application and Use of the PCAOB’s Interim Attestation Standards
• Beneficial Ownership Reporting –SEC Staff Updates Compliance and Disclosure Interpretations  

Extra Crunch

• SEC's Video Resource: Office Hours with Gary Gensler

About MaloneBailey, LLP

Taxpayers to Watch Out for Net Operating Loss and Business Loss Limitations

Summary - Starting last year, it was possible that taxpayers might 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. In this month's featured podcast, there is a discussion on how important it is for taxpayers to understand their estimated tax liabilities under new rules.

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.

Joint Ventures – FASB Discusses Joint Venture Formations

Summary - As reported in its “Summary of Decisions” publication, the FASB met on September 14, 2022, and discussed deliberated sweep issues related to its project on joint venture formations.

Decisions made during this meeting, included the following:

• Define formation date in the Master Glossary as the date on which an entity initially meets the definition of a joint venture.
• Require that a joint venture recognize any negative goodwill (the net identifiable assets recognized by the joint venture in excess of the fair value of the joint venture as a whole) resulting from the formation transaction as an adjustment to equity.
• Clarify the types of arrangements and business combinations guidance that a joint venture would analyze to determine whether transactions are separate from or part of the joint venture formation. The FASB decided that a joint venture would analyze whether any contingent payments to the venturers or employees are part of the joint venture formation or represent a transaction separate from the joint venture formation, while the business combinations guidance for preexisting relationships or acquisition-related costs would not apply.
• Clarify that the formation date is always the measurement date and that if multiple transactions are accounted for as a single transaction, then the identifiable assets and liabilities would be recognized when they have satisfied the recognition criteria in Subtopic 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Noncontrolling Interest.
• Require that any contingent arrangements deemed to be part of the joint venture formation and classified within assets or liabilities follow the guidance in Subtopic 805-20.
• Provide guidance for scenarios in which the joint venture replaces share-based payment awards.

For more information, click here.

© 2022 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Business Combinations –AICPA Publishes Working draft of Business Combinations Accounting and Valuation Guide

Summary - The AICPA has published for public comment a working draft of its Accounting and Valuation Guide, Business Combinations. This guide provides guidance and illustrations for preparers of financial statements, independent auditors, and valuation specialists regarding the accounting and valuation considerations for business combination transactions.

This guide addresses many accounting and valuation issues that have emerged over time to assist companies in addressing the challenges associated with accounting for business combination transactions as well as valuation of assets acquired and liabilities assumed.

Comments on this working draft should be provided by January 15, 2023.

For more information, click here.

© 2022 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Sale and Leaseback Transactions –IASB Issues Narrow-Scope Amendments for Sale and Leaseback Transactions 

Summary - The IASB has issued amendments to IFRS 16, Leases, which add to the requirements explaining how a company accounts for a sale and leaseback after the date of the transaction. A sale and leaseback is a transaction for which a company sells an asset and leases that same asset back for a period of time from the new owner.

IFRS 16 includes requirements on how to account for a sale and leaseback at the date the transaction takes place. However, IFRS 16 had not specified how to measure the transaction when reporting after that date. The amendments issued add to the sale and leaseback requirements in IFRS 16, thereby supporting the consistent application of the accounting standard.

These amendments will not change the accounting for leases other than those arising in a sale and leaseback transaction.

The amendments are effective for annual reporting periods beginning on or after January 1, 2024. Earlier application is permitted. A seller-lessee applies the amendments retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, to sale and leaseback transactions entered into after the date of initial application. 

For more information, click here.

© 2022 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Employee Benefit Plans –New Edition of AICPA Employee Benefit Plans: Best Practices in Presentation and Disclosure Published 

State and Local Governments –New Editions of AICPA Audit and Accounting Guide Published 

The AICPA has published a new edition of Employee Benefit Plans: Best Practices in Presentation and Disclosure. This publication provides illustrative disclosures for financial statements of employee benefit plans. It has been issued by the AICPA and is intended to provide practitioners with nonauthoritative practical guidance on such disclosures.

Among other things, this publication has been updated to reflect the following:

• Illustrative disclosures in accordance with ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement; and
• Illustrative auditor’s reports in accordance with SAS No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA, as amended (AU-C sec. 703).

The AICPA has published a new edition of its Audit and Accounting Guide, State and Local Governments. Featuring insights and best practices for some of the more complex areas such as leases, fiduciary activities, pensions and postemployment benefits other than pensions (OPEB), this authoritative guide provides complete coverage of audit and accounting considerations critical for both preparers and auditors.

This edition of the guide includes a new chapter that addresses accounting and financial reporting standards for leases for both lessees and lessors and auditing considerations for lessees. This chapter is designed to provide readers with an overview of the accounting and practical application of the lease guidance under GASB Statement No. 87, Leases, as amended. The chapter also addresses auditing considerations for lessees. Although no specific audit guidance is included for lessors, the audit guidance for lessees may be adapted as appropriate for lessors.

The guide has also been updated for the following guidance:

• GASB Statement No. 89, Accounting for Interest Cost Incurred before the End of a Construction Period;
• GASB Statement No. 91, Conduit Debt Obligations;
• GASB Statement No. 92, Omnibus 2020;
• GASB Statement No. 93, Replacement of Interbank Offered Rates;
• GASB Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements;
• GASB Statement No. 97, Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans — an amendment of GASB Statements No. 14 and No. 84, and a supersession of GASB Statement No. 32; and
• GASB Statement No. 98, The Annual Comprehensive Financial Report.

For more information, click here.

© 2022 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Information System Services –AICPA Issues New TQAs on Information Systems Services 

Summary - The AICPA has issued additional Technical Questions and Answers (TQAs) under Section 250, Nonattest Services — Information Systems Services. TQA Section 250 includes nonauthoritative guidance in question and answer format provided by the AICPA’s Professional Ethics Division Staff on whether various types of information system services outsourced to a member by an attest client would result in the member assuming a level of managerial responsibility for the client that would impair independence.

The new TQAs include the following:

• TQA section 250.02, “IT Help Desk;”
• TQA section 250.03, “Hypercare;” and
• TQA section 250.04, “IT Network Maintenance and Updates.”

TQA section 250.02, “IT Help Desk,” asks whether a member operating or managing an attest client’s information technology (IT) help desk results in the member assuming a level of management responsibility that impairs independence. The reply lists factors based on the activities and the level of responsibility and decision-making undertaken by the member that would threaten independence. Section 250.02 also provides a table of examples of “activities that indicate that the member’s professional services related to performing network maintenance (such as updating virus protection solutions, applying routine updates and patches, or configuring user settings) will or will not result in the member assuming a management responsibility.”

TQA section 250.03, “Hypercare,” discusses whether “postproduction stabilization support (that is, hypercare)” is “considered an implementation service or post-implementation service” and whether the services provided impair independence. The guidance notes that hypercare should last for “only a reasonably short period of time” depending on the scope and complexity of the implemented system. The member should use professional judgment determining what a reasonable period of time would be considering the specific client and software. Providing hypercare for a commercial off-the-shelf financial information system software solution would not impair independence, assuming all the nonattest services requirements are met.

TQA section 250.04, “Network Maintenance and Updates,” discusses the impairment of independence if the member is responsible for performing ongoing network maintenance and what a member should consider when evaluating whether the particular services provided would involve the member assuming management responsibilities. The answer provides a table with examples of activities that will or will not result in the member assuming a management responsibility of the client. 

For more information, click here.

© 2022 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Income Statement –FASB Discusses Disaggregation of Income Statement Expenses 

Summary - As reported in its “Summary of Decisions” publication, the FASB met on October 5, 2022, and continued its initial deliberations by discussing the disaggregation approach for income statement expenses. The FASB decided to pursue an expense disaggregation approach whereby an entity would be required to reconcile any disaggregated information to the relevant expense caption presented in the income statement. The FASB decided not to require disclosure in total for any additional specific expenses or costs incurred.



The FASB also decided to refine the project scope to include any relevant expense line items. That means that the project’s scope applies to any expense line items on the income statement that contain certain types of underlying information. Those expense captions would be required to be disaggregated, depending on the types of underlying expenses the Board later decides to require. Additionally, the FASB directed its staff to focus its research on all business entities. 

For more information, click here.

© 2022 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Leases –FASB Discusses Common Control Arrangements 

Summary - As reported in its “Summary of Decisions” publication, the FASB met on September 21, 2022, and decided to add a project to its technical agenda to address the following issues related to arrangements between entities under common control:

• Issue 1: What terms and conditions an entity should consider for: (1) determining whether a lease exists and, if so, (2) the classification and accounting for that lease.
• Issue 2: Accounting for leasehold improvements associated with leases between entities under common control.

For more information, click here.

© 2022 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Release No. 34-95763: Standards for Covered Clearing Agencies for U.S. Treasury Securities and Application of the Broker-Dealer Customer Protection Rule With Respect to U.S. Treasury Securities

Summary - The SEC has issued for public comment proposed rule changes that would enhance risk management practices for central counterparties in the U.S. Treasury market and facilitate additional clearing of U.S. Treasury securities transactions. The proposed rule changes would update the membership standards required of covered clearing agencies for the U.S. Treasury market with respect to a member’s clearance and settlement of specified secondary market transactions. Additional proposed rule changes are designed to reduce the risks faced by a clearing agency and incentivize and facilitate additional central clearing in the U.S. Treasury market.

If adopted as proposed, the proposal would require that clearing agencies in the U.S. Treasury market adopt policies and procedures designed to require their members to submit for clearing certain specified secondary market transactions.

These transactions would include all:

• Repurchase and reverse repurchase agreements collateralized by U.S. Treasury securities entered into by a member of the clearing agency;
• Purchase and sale transactions entered into by a member of the clearing agency that is an interdealer broker; and
• Purchase and sale transactions entered into between a clearing agency member and either a registered broker-dealer, a government securities broker, a government securities dealer, a hedge fund, or a particular type of leveraged account.

With respect to customer margin, the proposal would permit broker-dealers to include margin required and on deposit at a clearing agency in the U.S. Treasury market as a debit in the customer reserve formula, subject to certain conditions. In addition, the proposal would require clearing agencies in this market to collect and calculate margin for house and customer transactions separately. Finally, the proposal would require policies and procedures designed to ensure that the clearing agency has appropriate means to facilitate access to clearing, including for indirect participants. The public comment period will remain open for 60 days following publication of the proposing release in the Federal Register.

For more information, click here.

© 2022 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Release No. 34-96034: Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants

Summary - The SEC adopted amendments to the electronic recordkeeping, prompt production of records, and third-party recordkeeping service requirements applicable to broker-dealers, security-based swap dealers (SBSDs), and major security-based swap participants (MSBSPs). The SEC indicates that the “amendments are designed to modernize recordkeeping requirements given technological changes over the last two decades and to make the rule adaptable to new technologies in electronic recordkeeping. The amendments will also facilitate examinations of broker-dealers, SBSDs, and MSBSPs.”

The SEC’s broker-dealer electronic recordkeeping rule currently requires firms to preserve electronic records exclusively in a non-rewriteable, non-erasable format, known as the write once, read many format. The amendments add an audit-trail alternative under which electronic records can be preserved in a manner that permits the recreation of an original record if it is altered, over-written, or erased. The audit-trail alternative is designed to provide broker-dealers with greater flexibility in configuring their electronic recordkeeping systems so they more closely align with current electronic recordkeeping practices while also protecting the authenticity and reliability of original records. The amendments apply the same requirements to nonbank SBSDs and MSBSPs.

Among other things, to facilitate examinations and make them more efficient, the amendments also require broker-dealers and all types of SBSDs and MSBSPs to produce electronic records to securities regulators in a reasonably usable electronic format.

The final amendments will become effective 60 days after publication in the Federal Register. The compliance dates for the new requirements will be six months after publication in the Federal Register in the case of broker-dealers and 12 months after publication in the Federal Register in the case of SBSDs and MSBSPs.

For more information, click here.

© 2022 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Release No. 33-11101: Adoption of Updated EDGAR Filer Manual

Summary - The SEC has published a Final Rule, Adoption of Updated EDGAR Filer Manual. This new edition of the EDGAR Filer Manual has been updated to reflect recent SEC rulemaking, including changes to reflect amendments to rules to require the filing of certain applications, confidential treatment requests and forms from paper to electronic submission. The amended rules also require institutional investment managers to file confidential treatment requests for filings made under section 13(f) of the Securities Exchange Act of 1934 electronically on EDGAR.

For more information, click here.

© 2022 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Release No. 33-11098: Inflation Adjustments under Titles I and III of the JOBS Act

Summary - The SEC adopted amendments to its rules to implement inflation adjustments mandated by the Jumpstart Our Business Startups (JOBS) Act. The SEC is required to make inflation adjustments to certain JOBS Act rules at least once every five years. The new thresholds will become effective when they are published in the Federal Register.

The SEC adjusted the following thresholds:

• Emerging Growth Companies. Title I of the JOBS Act added Securities Act Section 2(a)(19) and Exchange Act Section 3(a)(80) to define the term "emerging growth company" (EGC). The SEC is required every five years to index to inflation the annual gross revenue amount used to determine EGC status to reflect the change in the Consumer Price Index for All Urban Consumers (CPI-U) published by the Bureau of Labor Statistics (BLS). To carry out this statutory directive, the SEC adopted amendments to Securities Act Rule 405 and Exchange Act Rule 12b-2 to reflect within the EGC definition an inflation-adjusted annual gross revenue threshold from $1,070,000,000 to $1,235,000,000.
• Regulation Crowdfunding. Title III of the JOBS Act added Securities Act Section 4(a)(6), which provides an exemption from the registration requirements of Securities Act Section 5 for certain crowdfunding transactions. Sections 4(a)(6) and 4A of the Securities Act set forth dollar amounts used in connection with the crowdfunding exemption, and Section 4A(h)(1) states that such dollar amounts shall be adjusted by the SEC not less frequently than once every five years to reflect the change in the CPI-U published by the BLS. The has adopted SEC adopted amendments to Regulation Crowdfunding to adjust certain of those dollar amounts for inflation pursuant to the statutory requirement.

The final rules will become effective upon their publication in the Federal Register.

For more information, click here.

© 2022 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

The Auditor’s Responsibility for Fraud Detection, Paul Munter, Acting Chief Accountant, Office of the Chief Accountant

Summary - SEC Acting Chief Accountant, Paul Munter, recently shared his perspectives on the auditor’s responsibility for fraud detection. Munter indicates that “Auditors are gatekeepers and therefore the importance of their responsibilities with respect to the identification of risks of material misstatement due to fraud (“fraud risks”) and the detection of material misstatements in the financial statements due to fraud should not be underestimated. This is particularly true because any changes to the macroeconomic and geopolitical environment in which companies operate may result in new pressures, opportunities, or rationalizations for fraud.”

Munter’s comments focus on the following topics:

• The auditor’s responsibilities with respect to fraud, including observations of some auditor shortcomings;
• How the auditor’s responsibilities are incorporated currently in the PCAOB standards, including the PCAOB’s quality control standards; and
• Reminders on good practices.

Key observations by Munter and the Office of the Chief Accountant (OCA) includes:

• An auditor should avoid exhibiting bias, which may result from focusing the risk assessment and the related audit response on risks of error and overlooking or failing to identify the fraud risks. It is critical that auditors evaluate whether information gathered throughout the audit indicates that one or more fraud risk factors are present and how fraud could be perpetrated or concealed by management.
• An auditor’s consideration of fraud is incorporated into many PCAOB auditing standards. OCA emphasizes that the auditor’s risk assessment and use of the fraud lens is an ongoing and iterative process that continues until the issuance of the audit report.
• A strong system of audit firm quality controls enables individual auditors to successfully perform their responsibilities with respect to fraud in the audit. Auditors may face pressures from various sources, both internal and external, during the audit. These pressures can distract an auditor from appropriately identifying and responding to fraud risks thereby reducing the likelihood that the auditor will detect material misstatements in the financial statements resulting from fraud.
• Auditors should be skeptical of evidence provided by management when the timing or manner in which such evidence is produced is questionable. This may include invoices for large amounts with vague descriptions, invoices with related parties with descriptions that are outside of the normal course of business, or “new” evidence provided by management in the late stages of the audit to address a potentially difficult or contentious audit matter. Auditors should avoid any assumptions of honesty, be mindful of potential unconscious biases, and apply the appropriate level of professional skepticism.
• It is critical for auditors to be alert to financial reporting areas that may be more frequently related to fraudulent schemes, such as improper revenue recognition and the intentional misstatement of accounting estimates.
• Auditors should avoid using the examples of fraud risk considerations and related responses included within the auditing standards as an exhaustive checklist. Audit responses should be tailored to the identified fraud risk and dynamic to changing business environments if auditors are to fulfill their professional responsibilities to consider fraud and to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by fraud or error.
• Access to granular data and information can increase transparency into underlying transactions, which through the use of technology may provide useful insights to assist with identifying unusual or unexpected relationships or helping auditors in performing more robust planning analytics. That said, it is important to remember that the use of technology is most effective when combined with sound professional judgment and other audit procedures that do not lend themselves to the use of technology.

For more information, click here.

© 2022 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

PCAOB Interim Attestation Standards –PCAOB Staff Requests Information and Comment on Application and Use of the PCAOB’s Interim Attestation Standards

Summary - As discussed above, the PCAOB issued a staff request for information and comment on matters related to the application and use of the PCAOB’s interim attestation standards. Input from the public will help inform any potential recommendation the staff may make to the PCAOB regarding updates to the standards.

Modernizing standards is one of the four key goals the PCAOB identified in its draft strategic plan, including modernizing interim standards that have not been updated since they were initially adopted decades ago. In April 2003, the PCAOB adopted, on an interim basis, certain attestation standards from the AICPA. These standards have continued in effect substantially as they were adopted.

PCAOB attestation standards apply to attest engagements, which generally involve issuing a report on subject matter, or an assertion about subject matter, that is the responsibility of another party.

Specifically, the staff is seeking information and views on the following:

• Use of attestation reports;
• Current practice related to attest engagements, including current and anticipated uses of PCAOB attestation standards;
• Potential updates to certain requirements for performing attest engagements; and
• Potential economic implications of standard setting in this area.

For more information, click here.

© 2022 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Beneficial Ownership Reporting –SEC Staff Updates Compliance and Disclosure Interpretations 

Summary - The staff in the SEC’s Division of Corporation Finance (Corp Fin) has updated the following Compliance and Disclosure Interpretations (C&DIs):

• Exchange Act Section 16 and Related Rules and Forms (UPDATED 10/07/2022) Section 109. Rule 16a-1 ― Definition of Terms (new Questions 109.02 and 209.06); and
• Exchange Act Sections 13(d) and 13(g) and Regulation 13D-G Beneficial Ownership Reporting (UPDATED 10/07/2022) Section 105. Rule 13d-3 ― Determination of Beneficial Ownership (new Question 105.07).

The SEC staff has revised these C&DIs to reflect Corp Fin’s views on certain aspects of the calculation and reporting of beneficial ownership status. 

For more information, click here.

© 2022 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.