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

We are pleased to release MaloneBailey's March 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

Navigating the Uplisting Process to Nasdaq

Recent Accounting & Regulatory Updates

Recent FASB & AICPA Updates

Income Statement Expenses –FASB Discusses Disaggregation of Income Statement Expenses
Software Costs –FASB Discusses Accounting and Disclosure of Software Costs
Engagements on Sustainability Information –New Edition of AICPA Audit and Accounting Guide Published
Risk Assessment –New Edition of AICPA Audit and Accounting Guide Published
Noncompliance with Laws –New AICPA Q&A Published
Government Auditing Standards –GAO Proposes Updates to Government Auditing Standards
Crypto Assets –FASB Discusses the Accounting for Crypto Assets
GASB Implementation Guidance –GASB Proposes Additional Proposal for Implementation Guidance
Governmental Auditing Standards –GAO Issues Professional Standards Update No. 87

Recent SEC & PCAOB Updates

Conflicts of Interest –SEC Proposes Rule to Prohibit Conflicts of Interest in Certain Securitizations
Quality Control Defects –PCAOB Releases Spotlight on Remediation of Quality Control Defects
Release No. 34-96768: Supplemental Standards of Ethical Conduct for Members and Employees of the Securities and Exchange Commission
Release No. 33-11151: Prohibition Against Conflicts of Interest in Certain Securitizations
Division of Corporation Finance - Financial Reporting Manual

Tax

Schedules K-2 & K-3: Background and Filing Exceptions

Extra Crunch

Journal of Accountancy Podcast

About MaloneBailey, LLP

Featured Podcast

Navigating the Uplisting Process to Nasdaq

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

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

Income Statement Expenses – FASB Discusses Disaggregation of Income Statement Expenses

Summary - As reported in its “Summary of Decisions” publication, the FASB met on January 11, 2023, and continued its initial deliberations by discussing what information entities would be required to provide when disaggregating income statement expenses.

The FASB decided to require that entities disclose:

Costs incurred that are expensed as incurred; and
Costs incurred that are capitalized as inventory (and subject to subsequent measurement requirements in Topic 330, Inventory).

The FASB also decided to require that entities disclose the amounts of: (1) employee compensation; (2) depreciation of property, plant, and equipment; (3) amortization of intangible assets; and (4) inventory expense included in each relevant expense line item in the income statement. The FASB indicated that it will discuss at a future meeting whether other types of depreciation, amortization, or depletion other than depreciation of property, plant, and equipment and amortization of intangible assets should be disclosed.

For more information, click here.

Software Costs –FASB Discusses Accounting and Disclosure of Software Costs

Summary - As reported in its “Summary of Decisions” publication, the FASB met on January 18, 2023, and discussed the recent feedback received from a wide variety of stakeholders on various models. The FASB directed its staff to further research the initial development cost model, including ways to increase the operability and consistency of the application of that model.

The initial development cost model would require that all direct software development costs and software enhancement costs be capitalized from the point at which it is probable that the software will be:

Completed; and
Used to perform the function intended.

Software development costs incurred after the software is substantially complete and ready for its intended use and ongoing maintenance costs would be expensed as incurred.

For more information, click here.

Various New Editions of AICPA Guides Published

Engagements on Sustainability Information –New Edition of AICPA Audit and Accounting Guide Published

The AICPA has published a new edition of its Audit and Accounting Guide, Attestation Engagements on Sustainability Information (Including Greenhouse Gas Emissions Information and Climate-Related Financial Disclosures) (Updated As of December 1, 2022). This new edition has been developed by the AICPA Auditing Standards Board (ASB) Sustainability Task Force to assist practitioners in performing and reporting on their attestation engagements that address an entity’s sustainability information.

Risk Assessment –New Edition of AICPA Audit and Accounting Guide Published

The AICPA has published a new edition of its Audit and Accounting Guide, Risk Assessment in a Financial Statement Audit (Updated As of January 1, 2023). This new edition has been developed under the supervision of the AICPA Risk Assessment Audit Guide Task Force. The purpose of the guide is to help practitioners fulfill their responsibilities for identifying and assessing risks of material misstatement in a financial statement audit that is performed in accordance with generally accepted auditing standards (GAAS) as established by the ASB. GAAS established by the ASB are applicable to audits of non-issuers. Audits of non-issuers are audits of the financial statements of those entities not subject to the oversight authority of the PCAOB (that is, entities not within its jurisdiction).

Noncompliance with Laws –New AICPA Q&A Published

The AICPA has published Q&A Section 90: Responding to Noncompliance With Laws and Regulations. This Q&A provides guidance on whether the new "Responding to Noncompliance With Laws and Regulations" interpretations under the “Integrity and Objectivity Rule” (ET sec. 1.180.010 and 2.180.010) general guidance or do they impose specific responsibilities when a member becomes aware of noncompliance with laws and regulations (NOCLAR) or suspected NOCLAR?

For more information, click here.

Government Auditing Standards –GAO Proposes Updates to Government Auditing Standards

Summary - The U.S. Government Accountability Office (GAO) has issued an exposure draft with proposed updates to Generally Accepted Government Auditing Standards (GAGAS), also known as the Yellow Book. These proposed updates reflect developments in accounting and auditing professions since the last update. The GAO has requested public comments on the proposed changes by April 28, 2023.

The GAO intends the proposed update “to strengthen and modernize audit organizations’ systems for managing engagement quality using a proactive and risked-based approach,” according to Gene L. Dodaro, Comptroller General of the United States and the head of GAO. “The proposed approach is intended to help ensure that audit organizations produce reliable, objective, and high-quality work for use in holding management and officials entrusted with public resources accountable for carrying out their duties.”

The GAO also expects the proposed updates to improve the scalability of the standard for audit organizations of various sizes and those with quality management systems that vary in complexity and formality. Some of the proposed amendments include:

A change in approach from quality control to quality management;
Use of a risk-based process for achieving the objectives of quality management;
Provisions for optional engagement quality reviews of GAGAS engagements; and
Application guidance on key audit matters for the public sector.
To ensure that the proposed standards meet the needs of auditors who use GAGAS, the Comptroller General has convened an advisory council consisting of representatives from federal, state, and local governments and the private sector and academia. The 2023 exposure draft includes the advisory council’s input.

For more information, click here.

Crypto Assets –FASB Discusses the Accounting for Crypto Assets

Summary - As reported in its “Summary of Decisions” publication, the FASB met on February 1, 2023 and discussed clarifications to the scope, transition, costs and benefits of the decisions reached, and the comment period.

The FASB decided to clarify that the scope of this project would exclude crypto assets created or issued by the reporting entity or their related parties. The FASB also observed that the scope criteria would exclude assets commonly referred to as “wrapped tokens” and that the FASB’s basis for conclusions should clearly emphasize that point. The FASB decided to not modify the scope criteria to specify that the distributed ledger or blockchain must be public.

The FASB decided that early adoption should be permitted and that a cumulative-effect adjustment to retained earnings (or other appropriate components of equity or net assets in the statement of financial position) would be recognized as of the beginning of the first annual period in which the guidance is adopted. The FASB decided that all entities, including nonpublic entities, should be subject to the same effective date and transition requirements. The FASB is expected to further consider this in establishing the effective date in the issuance of a final Accounting Standards Update (ASU).

The FASB concluded that it has received sufficient information and analysis to make an informed decision on the expected costs of the proposed amendments and that the expected benefits of those amendments would justify the expected costs.

The FASB directed the staff to draft a proposed ASU for vote by written ballot. Additionally, the FASB decided to expose the proposed ASU for public comment for 75 days.

For more information, click here.

GASB Implementation Guidance –GASB Proposes Additional Proposal for Implementation Guidance

Summary - The GASB has issued for public comment and Exposure Draft, Additional Proposal for Implementation Guidance Update—2023. This proposal seeks feedback on guidance that clarifies, explains, or elaborates on Statement No. 96, Subscription-Based Information Technology Arrangements. The question and answer proposed in this document supplements the implementation guidance in the proposed Implementation Guide, Implementation Guidance Update: 2023. Accordingly, the following provisions of that proposed Implementation Guide apply to the question and answer in this document: the applicability provisions in paragraph 2, the effective date and transition provisions in paragraph 6, and the materiality provisions.

Comments on the proposal are due March 10, 2023.

For more information, click here.

Governmental Auditing Standards –GAO Issues Professional Standards Update No. 87

Summary - The Government Accountability Office (GAO) has published Professional Standards Update (PSU) No. 87 covering standards published from October through December 2022.

PSUs alert the audit community to changes in and highlight the issuance and effective dates of recent standards and guidance related to engagements conducted in accordance with Government Auditing Standards. They provide brief summaries of recently issued standards of major auditing and accounting standard-setting bodies, including, among others, the GAO, the FASB, GASB, and AICPA. Auditors may use the GAO’s Governmental Auditing Standards: 2018 Revision Technical Update April 2021 (Yellow Book) in connection with professional standards issued by the GAO and other authoritative bodies.

While PSUs inform Yellow Book users of important changes to professional requirements and highlight key points of recent standards, they do not establish new professional standards, reflect GAO official views on these requirements, nor provide complete summaries of the standards.

The content in PSU 87 is divided into two sections:

Section I identifies select standards and guidance with their respective effective dates.
Section II identifies select standards and guidance issued from October through December 2022.

Users should refer to the original, authoritative standards for details on those standards and for purposes of implementing them.

For more information, click here.

Recent SEC & PCAOB Updates

Conflicts of Interest –SEC Proposes Rule to Prohibit Conflicts of Interest in Certain Securitizations

Summary - The SEC has proposed for public comment a rule to implement Section 27B of the Securities Act of 1933, a provision added by Section 621 of the Dodd-Frank Act. The rule is intended to prevent the sale of asset-backed securities (ABS) that are tainted by material conflicts of interest. Specifically, the rule would prohibit securitization participants from engaging in certain transactions that could incentivize a securitization participant to structure an ABS in a way that would put the securitization participant's interests ahead of those of ABS investors. The SEC originally proposed a rule to implement Section 27B in September 2011.

If adopted, new Securities Act Rule 192 would prohibit an underwriter, placement agent, initial purchaser, or sponsor of an ABS, including affiliates or subsidiaries of those entities, from engaging, directly or indirectly, in any transaction that would involve or result in any material conflict of interest between the securitization participant and an investor in such ABS. Under the proposed rule, such transactions would be “conflicted transactions.” They include, for example, a short sale of the ABS or the purchase of a credit default swap or other credit derivative that entitles the securitization participant to receive payments upon the occurrence of specified credit events in respect of the ABS. The prohibition on conflicted transactions would commence on the date on which a person has reached, or has taken substantial steps to reach, an agreement that such person will become a securitization participant with respect to an ABS, and it would end one year after the date of the first closing of the sale of the relevant ABS.

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

For more information, click here.

Quality Control Defects –PCAOB Releases Spotlight on Remediation of Quality Control Defects

Summary - The PCAOB released a new staff Spotlight Additional Insights on the Remediation Process. As part of its strategic drive to enhance PCAOB inspections, the PCAOB is focused on audit firms’ quality control defects – particularly those that are persistent – and the steps that firms take to remediate them.

Under the Sarbanes-Oxley Act and PCAOB rules, the PCAOB does not disclose its criticisms of a firm’s quality control systems for a period of 12 months after the initial publication of an inspection report. During that period, the firm is expected to address identified quality control deficiencies. If the firm fails to address quality control deficiencies to the PCAOB’s satisfaction, those criticisms are disclosed to the public.

This staff Spotlight highlights some of the factors that the PCAOB staff considers, particularly related to design, implementation, and effectiveness of a firm’s actions to remediate quality control deficiencies. Key considerations discussed include heightened expectations for addressing repeat or persistent quality control deficiencies, the importance of root cause analysis, how the PCAOB staff considers subsequent inspection results, PCAOB staff expectations on the timing of remediation design and implementation, and more.

This Spotlight reflects the staff’s current remediation program, as well as previous PCAOB and staff guidance documents available on the PCAOB’s website.

For more information, click here.

Release No. 34-96768: Supplemental Standards of Ethical Conduct for Members and Employees of the Securities and Exchange Commission

Summary - The SEC has proposed for public comment amendments to its ethics rules to strengthen and modernize its ethics compliance program. The amendments would add new requirements and prohibitions to the program, which already includes some of the most stringent ethics requirements in the executive branch for all agency employees, their spouses, and minor children.

The SEC indicates that current rules require agency employees to preclear securities transactions and comply with minimum holding periods. All employees are prohibited from, among other things, transacting in securities of companies the agency is investigating, engaging in short selling, transacting in derivatives, participating in initial public offerings for seven calendar days, or purchasing or carrying securities on margin.

The amendments, which are being proposed jointly with the Office of Government Ethics, would:

Expand the existing prohibited holdings restrictions to ban employees from investing in financial industry sector funds;
Authorize the SEC to collect data on employees’ covered securities transactions and holdings directly from financial institutions through an automated electronic system; and
Exempt diversified mutual funds from the Supplemental Ethics Rule’s requirements, given that they generally pose a low risk of conflicts of interest, misuse of nonpublic information for personal gain, or appearance problems. Mutual funds that concentrate investments in a particular sector, industry, business, state, or country other than the United States would remain subject to the rules.

For more information, click here.

Release No. 33-11151: Prohibition Against Conflicts of Interest in Certain Securitizations

For more information, click here.

Division of Corporation Finance - Financial Reporting Manual

Summary - The staff in the SEC’s Division of Corporation Finance (Corp Fin) has published a new edition of its Division of Corporation Finance Financial Reporting Manual (Manual). Sections of the Manual have been updated as of December 31, 2022. These sections have been marked with the date tag, “Last updated: 12/31/2022,” to identify the changes.

This new edition has been updated for a number of SEC rulemakings and changes, including:

Updated the phone number for contacting Corp Fin staff and provided a link to the new online submission for financial statement waiver or substitution requests.
Revisions for amendments to Rules 3-10 and 3-16 of Regulation S-X in SEC Release No. 33-10763, Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities.
Revisions to add guidance related to the implementation of Accounting Standards Update (ASU) No. 2018-12, Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts.
Removed information that is no longer applicable due to the passage of time.

For more information, click here.

Tax

Schedules K-2 & K-3: Background and Filing Exceptions

Written by Travis Moffett, Tax Manager

For tax years beginning in 2021, the IRS released new schedules for pass-through international tax reporting. Schedules K-2 and K-3 were issued to capture the international tax provisions of the Tax Cuts and Jobs Act (TCJA). These Schedules are intended to standardize the international tax information reporting to flow-through investors. While these schedules provide more tax information to partners and S Corporation shareholders, they also increase the reporting burden and compliance costs to partnerships and S corporations. Good news is that the IRS has included a domestic filing exception for partnerships and S corporations for tax years beginning in 2022.

Background

Schedules K-2 (Partners’ Distributive Share Items-International) and K-3 (Partner’s Share of Income, Deductions, Credits, etc.-International) replaced and expanded reporting requirements for international tax items in an effort to expand and streamline the presentation level of detail provided with respect to U.S. international tax information. These international items were previously provided as footnotes to Schedules K and K-1. Flow-thru entities that are required to file Form 1065, 1120-S, or 8865 that has items relevant to the determination for U.S. tax or certain reporting obligations of its partners or shareholders must file Schedules K-2 and K-3.

Filing Exceptions

However, the IRS partnership instructions for Schedules K-2 and K-3 include an exception. A domestic partnership does not need to (a) complete and file with the IRS the Schedule K-2 and K-3, or (b) furnish to a partner the Schedule K-3 (except if requested by a partner after the 1-month date) if each of the following criteria are met:

No or limited foreign activity: Defined as foreign income taxes paid or accrued, foreign source income or loss, or an ownership interest in a foreign partnership, corporation, foreign branch, or foreign disregarded entity; or foreign activity is limited to passive category foreign income generated no more than $300 of taxes subject to the foreign tax credit (and shown on a payee statement);
U.S. citizen/resident alien partners: During tax year, all the direct partners in the domestic partnership are: (a) individuals that are U.S. citizens; (b) individuals that are resident aliens; (c) domestic decedent’s estates (that is, decedent’s estates that are not foreign estates), with solely U.S. citizen and/or resident alien individual beneficiaries; (d) domestic grantor trusts that are not foreign trusts and that have solely U.S. citizen and/or resident alien individual grantors and solely U.S. citizen and/or resident alien individual beneficiaries; (e) domestic non-grantor trusts with solely U.S. citizen and/or resident alien individual beneficiaries; (f) S corporations with a sole shareholder, or (g) single-member LLCs that are disregarded entities and have as their sole member any of the other eligible categories of partners;
Partner notification: With respect to a partnership that satisfies criteria 1 and 2, partners receive a notification from the partnership either electronically or by mail no later than the time the partnership furnishes Schedules K-1 that the partners will not receive Schedules K-3 unless they request one.; and
No Schedule K-3 requests by the 1-month date: The partnership does not receive a request from any partner for Schedule K-3 information on or before the 1-month date. The “1-month date” is one month before the date the partnership files the Form 1065.

If a partnership receives a request from a partner for the Schedule K-3 information after the 1-month date and has not received a request from any other partner for Schedule K-3 information on or before the 1-month date, the domestic filing exception is met and the partnership is not required to file the Schedules K-2 and K-3 with the IRS or furnish the Schedule K-3 to the non-requesting partners. However, the partnership is required to provide the Schedule K-3, completed with the requested information, to the requesting partner on the later of the date on which the partnership files the Form 1065 or one month from the date on which the partnership receives the request from the partner.

If the partnership received a request from a partner for Schedule K-3 information on or before the 1-month date and therefore the partnership does not satisfy criterion 4, the partnership is required to file the Schedules K-2 and K-3 with the IRS and furnish the Schedule K-3 to the requesting partner. The Schedules K-2 and K-3 are required to be completed only with respect to the parts and sections relevant to the requesting partner.

If you have any questions, please feel free to contact us at nzhao@malonebailey.com

Extra Crunch

Journal of Accountancy Podcast

Summary - The Journal of Accountancy provides an informational podcast that covers a variety of topics affecting those in the world of accountancy.

From conversations about culture and recruiting to technical topics about digital asset security and tax standards, the discussions are varied and vast.

The podcast is available here.

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