We are pleased to release MaloneBailey's October 2020 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
What's the Crunch?

Featured Podcast

  • Tips & Tricks to Ace Your Virtual Interview

COVID-19 Related Updates

  • Health Care Entities – AICPA Issues Additional CARES ACT TQAs for Health Care Entities 
  • PPP Lenders – AICPA Issues Additional TQA Guidance for PPP Lenders 

Recent Accounting & Regulatory Updates

Recent FASB & AICPA Updates

  • Exposure Draft - Proposed Accounting Standards Update 2020-200 —Compensation —Stock Compensation (Topic 718): Determining the Current Price of an Underlying Share for Equity-Classified Share-Option Awards  
  • Leases – FASB Offers Limited Effective Date Delays on Revenue Recognition and Leases Standards 
  • Circular A-133 – OMB Issues 2020 Compliance Supplement to Circular A-133
  • Interest Rate Reform – IASB Issues Phase 2 of Interest Rate Benchmark Reform  
  • Material Misstatements – AICPA Proposes Standard on Assessing Risks of Material Misstatement 
  • Liability vs. Equity – FASB Discusses Distinguishing Liabilities from Equity 

Recent SEC & PCAOB Updates

  • Release No. 33-10829: Temporary Amendments to Regulation Crowdfunding; Extension 
  • Release No. 33-10825: Modernization of Regulation S-K Items 101, 103, and 105 
  • Release No. 33-10824: Amending the “Accredited Investor” Definition 
  • Release No. 34-89618: Rescission of Effective-Upon-Filing Procedure for NMS Plan Fee Amendments and Modified Procedures for Proposed NMS Plans and Plan Amendments 
  • SEC Staff Speech, Statement on SEC Response to the Report of the President’s Working Group on Financial Markets by Chairman Jay Clayton 

Tax Updates

  • Final Regulations Released for Bonus Depreciation

Extra Crunch

  • Virtual Panel Discussion: Small Businesses in the Public Markets

About MaloneBailey, LLP
Featured Podcast
Tips and Tricks to Ace Your Virtual Interview

Summary - In this episode of “Everybody Counts”, Caroline Rosen, Marketing and Communications Manager and Shelby Stevens, Human Resources Generalist, discuss the dos and don'ts for candidates to consider during their virtual interviews.

For this podcast and many more, please visit the Resources section of the MaloneBailey website.

COVID-19 Related Updates
Health Care Entities – AICPA Issues Additional CARES ACT TQAs for Health Care Entities 

Summary - The AICPA has issued new Technical Questions and Answers (TQAs) under Section 6400, Health Care Entities. This set of TQAs provides guidance on CARES Act provisions specific to health care entities.

TQA Section 6400, Health Care Entities, includes guidance in the form of questions and answers for practitioners in application of FASB standards by hospitals, physician’s offices, and other health care providers and entities. Because the pandemic continues to create a financial strain on hospitals, physicians, and other health care entities, the AICPA issued this new set of TQAs to help nongovernmental health care entities account for payments received from the CARES Act, the Provider Relief Fund, and boosted Medicare and Medicaid payments.

These TQAs comprise ten pages of nonauthoritative accounting guidance developed by the AICPA Health Care Expert Panel. They address questions regarding CARES Act provisions and COVID-related FEMA funding specific to nongovernmental health care entities, which include business entities and not-for-profit entities.

“There is currently no explicit guidance within U.S. Generally Accepted Accounting Principles (GAAP) on the accounting for government grants to health care business entities,” said Andy Mrakovcic, CPA, AICPA Manager – Public Accounting and Staff Liaison to the AICPA Health Care Expert Panel. “We hope these TQAs will help health care business entities select an appropriate accounting model when applying for a government grant.”

The TQAs provide background information in the first TQA and address seven inquiries, including:
  • TQA section 6400.63, “Background to Sections 6400.64–.70 — CARES Act Provisions Specific to Health Care Entities;”
  • TQA section 6400.64, “Accounting for Provider Relief Fund Phase 1 General Distribution Payments;”
  • TQA section 6400.65, “Recognition Uncertainties Associated With Provider Relief Fund General Distribution Payments;”
  • TQA section 6400.66, “Period of Accounting for Provider Relief Fund General Distribution Payments;”
  • TQA section 6400.67, “Accounting for Uninsured Pool Portion of Provider Relief Funds;”
  • TQA section 6400.68, “Accounting for Payments Received Under the Medicare Accelerated and Advance Payment Program;”
  • TQA section 6400.69, “Accounting for Temporary Increases in Medicare and Medicaid Payments;” and
  • TQA section 6400.70, “FEMA Public Assistance Payments to NFP Health Care Entities for Emergency Protective Measures During the COVID-19 Pandemic.”

The AICPA also advises that when selecting an appropriate accounting model to apply to a government grant, a health care business entity should consider:
  • U.S. GAAP guidance on selecting accounting principles for transactions or events for which no guidance exists (FASB ASC 105, Generally Accepted Accounting Principles);
  • The specific characteristics and facts and circumstances associated with the grant; and
  • Any preexisting accounting policies the entity may have established for government grants.

For more information, click here.

© 2020 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
PPP Lenders – AICPA Issues Additional TQA Guidance for PPP Lenders 

Summary - The AICPA and its Depository Institutions Expert Panel (DIEP) have released an additional Technical Questions and Answer (TQA) to help depository institutions, credit unions, credit card companies, broker-dealers, insurance companies and other lenders appropriately account for the loans they distribute under the Paycheck Protection Program (PPP).

The new TQA provides guidance for accounting for the loan when the borrower is not eligible for loan forgiveness, or failed to timely complete a loan forgiveness application and submit the required documentation to its lender, and when the Small Business Administration (SBA) determines in the course of its review that the borrower was ineligible for the PPP loan. In these situations, the loan will not be eligible for forgiveness, and immediate payment will be required.

The TQA answers the question, how should a lender account for the forgivable portion of the loan that is eligible for forgiveness during the settlement process, including the time period subsequent to the lender’s determination that the borrower is eligible for forgiveness and through the receipt of payment from the SBA?

The answer provides that the lender should continue to account for the forgivable portion of the loan as an interest-bearing loan (including amortization of loan origination fees, as noted in TQA Section 2130.44) through receipt of payment from the borrower or the SBA. Payments received from either the borrower or the SBA prior to maturity of the loan (other than required payments of principal and interest) are considered prepayments of the loan. Further, when payment is received from the borrower or the SBA (either in full or in part) prior to the loan’s maturity, amounts received should be accounted for as a prepayment, and unamortized loan origination fees should be accounted for in accordance with FASB ASC 310- 20, Receivables—Nonrefundable Fees and Other Costs. 

For more information, click here.

© 2020 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Recent FASB & AICPA Updates
Exposure Draft - Proposed Accounting Standards Update 2020-200 —Compensation —Stock Compensation (Topic 718): Determining the Current Price of an Underlying Share for Equity-Classified Share-Option Awards

Summary - The FASB issued a proposed Accounting Standards Update (ASU) intended to reduce cost and complexity for private companies when determining the fair value of the shares underlying a share-option award on its grant date or modification date. Stakeholders are encouraged to review and provide comment on the document, as issued by the Private Company Council (PCC) by October 1, 2020.

“Members of the PCC conveyed concerns that current guidance on determining fair value for these shares creates unnecessary cost and complexity for some stakeholders,” stated FASB Chair Richard R. Jones. “The proposed ASU puts forth a potential solution to this issue, and we look forward to hearing what our stakeholders think about it.”

The PCC shared stakeholder concerns that determining the fair value of traditional private company share-option awards is often costly and complex. This is primarily because the private company equity shares underlying the share option often are not actively traded and, thus, observable market prices for those shares or similar shares do not exist.

The proposed ASU would allow a nonpublic entity to determine the current price of a share underlying an equity-classified share-option award using a valuation method performed in accordance with specific regulations of the U.S. Department of the Treasury that provide acceptable methodologies to comply with the “presumption of reasonableness” requirements of Section 409A of the U.S. Internal Revenue Code.

For more information, click here.

© 2020 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Leases – FASB Offers Limited Effective Date Delays on Revenue Recognition and Leases Standards

Summary - The FASB issued an Accounting Standards Update (ASU) that grants a one-year effective date delay for certain companies and organizations applying the revenue recognition and leases guidance. Early application continues to be permitted.

The ASU permits private companies and not-for-profit organizations that have not yet applied the revenue recognition standard to do so for annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020.

For leases, the ASU provides an effective date deferral to private companies, private not-for-profit organizations, and public not-for-profit organizations that have not yet issued (or made available) their financial statements reflecting the adoption of the guidance. It is intended to provide near-term relief for certain entities for whom the leases adoption is imminent.

Under the ASU, private companies and private not-for-profit organizations may apply the new leases standard for fiscal years beginning after December 15, 2021, and to interim periods within fiscal years beginning after December 15, 2022. Public not-for-profit organizations that have not yet issued (or made available to issue) financial statements reflecting the adoption of the leases guidance may apply the standard for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. 

For more information, click here.

© 2020 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Circular A-133 – OMB Issues 2020 Compliance Supplement to Circular A-133

Summary - The White House Office of Management and Budget (OMB) has issued the 2020 Compliance Supplement.

The 2020 Supplement is effective for audits of fiscal years beginning after June 30, 2019 and supersedes the 2019 Compliance Supplement dated August 2019.

The 2020 Compliance Supplement, like previous annual Compliance Supplements, adds, deletes, and modifies prior Supplement sections. In addition, it 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 this OMB mandate. Additionally, this six-requirement mandate does not apply to programs not included in this Supplement.

Appendix V provides a list of changes from the 2019 Compliance Supplement. However, changes in the Matrix of Compliance Requirements are reflected in Part 2 of the 2020 Compliance Supplement and not in Appendix V. 

For more information, click here.

© 2020 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Interest Rate Reform – IASB Issues Phase 2 of Interest Rate Benchmark Reform

Summary - The International Accounting Standards Board (IASB) has issued amendments to International Financial Reporting Standards (IFRS), Interest Rate Benchmark Reform—Phase 2. The Phase 2 benchmark reform amendments finalize the IASB response to the ongoing reform of inter-bank offered rates (IBOR) and other interest rate benchmarks by issuing a package of amendments to IFRS Standards. The amendments are aimed at helping companies to provide investors with useful information about the effects of the reform on those companies’ financial statements.

These amendments complement those issued in 2019 and focus on the effects on financial statements when a company replaces the old interest rate benchmark with an alternative benchmark rate as a result of the reform.

The Phase 2 benchmark reform amends IFRS 9, Financial Instruments; IAS 39, Financial Instruments: Recognition and Measurement; IFRS 7, Financial Instruments: Disclosures; IFRS 4, Insurance Contracts; and IFRS 16, Leases.

These amendments relate to:
  • Changes in contractual cash flows: a company will not be required to derecognize or adjust the carrying amount of financial instruments for changes required by the reform, but will instead update the effective interest rate to reflect the change to the alternative benchmark rate;
  • Hedge accounting: a company will not have to discontinue hedge accounting solely because it makes changes required by the reform, if the hedge meets other hedge accounting criteria; and
  • Disclosures: a company will be required to disclose information about new risks arising from the reform and how it manages the transition to alternative benchmark rates.

These amendments are effective for annual reporting periods beginning on or after January 1, 2021, with early adoption permitted. 

For more information, click here.

© 2020 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Material Misstatements – AICPA Proposes Standard on Assessing Risks of Material Misstatement

Summary - The Auditing Standards Board (ASB) of the AICPA has issued the exposure draft, Proposed Statement on Auditing Standards (SAS), Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement. The proposed SAS is designed to superseded SAS No. 122, Statements on Auditing Standards: Clarification and Recodification, as amended, Section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement. The comment deadline is November 25, 2020.

“The way business is conducted and the manner in which entities record, process and summarize financial information has evolved rapidly,” said Bob Dohrer, AICPA Chief Auditor. “This evolution affects the auditor’s assessment of the risks of material misstatement. This proposed SAS, which reflects this ongoing transformation, improves audit quality by enhancing the auditor’s process for identifying and responding to the risks of material misstatement in an entity’s financial statements.”

The ASB based the proposal on the International Standard on Auditing (ISA) 315, Identifying and Assessing the Risks of Material Misstatement. The overall objectives of this proposed SAS are to:
  • Enhance the requirements and guidance on identifying and assessing the risks of material misstatement, particularly the guidance that addresses the entity’s system of internal control and information technology; and
  • Revise the definition of significant risks. The current definition focuses on risks that require special audit considerations, whereas the proposed revision focuses on where those risks lie on the spectrum of inherent risk and includes new guidance intended to enhance an auditor’s professional skepticism. 

For more information, click here.

© 2020 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Liability vs. Equity – FASB Discusses Distinguishing Liabilities from Equity

Summary - As reported in its “Summary of Board Decisions” publication, the FASB met on September 2, 2020 and affirmed that the objective of its project to improve the accounting for asset acquisitions and business combinations. The objective of this project is to improve the accounting for asset acquisitions and business combinations by narrowing the differences between the two acquisition models (the accounting for acquisitions of assets and for the acquisitions of businesses). The FASB directed its staff to consider the existing acquisition models, as well as other alternatives to narrow the differences and improve the accounting.

The FASB affirmed that the project should address the accounting for contingent consideration, transaction costs, certain recognition and measurement exceptions, as well as the accounting for contingent consideration and in-process research and development (IPR&D) by a primary beneficiary of a variable interest entity that is not a business. The FASB removed from the scope of the project:
  • Narrowing differences between the accounting for IPR&D in acquisitions of assets and acquisitions of businesses.
  • The accounting for reassessments of lease contracts in asset acquisitions and the lease recognition and measurement exception. These lease issues will be considered as part of the FASB’s implementation efforts on leases.

For more information, click here.

© 2020 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Recent SEC & PCAOB Updates
Release No. 33-10829: Temporary Amendments to Regulation Crowdfunding; Extension

Summary - The SEC is extending the effective date and applicability dates of our temporary final rules under Regulation Crowdfunding to facilitate capital formation for small businesses impacted by the COVID-19 pandemic. The temporary final rules are intended to “expedite the offering process for smaller, previously established companies directly or indirectly affected by COVID-19 that are seeking to meet their funding needs through the offer and sale of securities” made pursuant to Regulation Crowdfunding.

The temporary final rules are designed to facilitate this offering process by providing tailored, conditional relief from certain requirements of Regulation Crowdfunding relating to the timing of the offering and the availability of financial statements required to be included in issuers’ offering materials while retaining appropriate investor protections.

The amendments in this rule are effective from August 31, 2020 through September 1, 2021. The expiration date for the temporary final rules previously published May 7, 2020 is extended from March 1, 2021, to September 1, 2021. The temporary final rules apply to securities offerings initiated under Regulation Crowdfunding between May 4, 2020, and February 28, 2021.

For more information, click here.

© 2020 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Release No. 33-10825: Modernization of Regulation S-K Items 101, 103, and 105

Summary - The SEC announced that it voted to adopt amendments to modernize the description of business (Item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105) that registrants are required to make pursuant to Regulation S-K. These disclosure requirements have not undergone significant revisions in over 30 years. The amendments the Commission is adopting today update these items to reflect the many changes in our capital markets and the domestic and global economy in recent decades.

Many of the amendments reflect the Commission's long-standing commitment to a principles-based, registrant-specific approach to disclosure. These disclosure requirements, while prescriptive in some respects, are rooted in materiality and are designed to facilitate an understanding of each registrant's business, financial condition, and prospects. The rules are designed for this information to be presented on a basis consistent with the lens that management and the board of directors use to manage and assess the registrant's performance. The modernization of Items 101, 103, and 105 is intended to elicit improved disclosures, tailored to reflect registrants' particular circumstances, which are designed will improve disclosures for investors and add efficiencies to the compliance efforts of registrants. The amendments are also intended to improve the readability of disclosure documents, as well as discourage repetition and reduce the disclosure of information that is not material.

For more information, click here.

© 2020 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Release No. 33-10824: Amending the “Accredited Investor” Definition
Summary - The SEC adopted amendments to the “accredited investor” definition, one of the principal tests for determining who is eligible to participate in our private capital markets. Historically, individual investors who do not meet specific income or net worth tests, regardless of their financial sophistication, have been denied the opportunity to invest in our multifaceted and vast private markets. The amendments update and improve the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in those markets.

The amendments allow investors to qualify as accredited investors based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth. The amendments also expand the list of entities that may qualify as accredited investors, including by allowing any entity that meets an investments test to qualify.

For more information, click here.

© 2020 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Release No. 34-89618: Rescission of Effective-Upon-Filing Procedure for NMS Plan Fee Amendments and Modified Procedures for Proposed NMS Plans and Plan Amendments

Summary - The SEC rescinded a rule exception that allowed a proposed national market system (NMS) plan fee amendment to become effective upon filing, prior to review and comment by investors and other market participants. According to the SEC, the new procedures require public notice of any proposed NMS plan fee amendment, an opportunity for public comment, and SEC approval by order before a new or changed fee can be charged. The SEC also modified the procedures for review of all proposed NMS plans and plan amendments, including fee amendments, to specify timelines for SEC action for each step of the process, adding certainty to the process for NMS plan participants.
The amendments will be effective 30 days after publication in the Federal Register.

For more information, click here.

© 2020 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
SEC Staff Speech, Statement on SEC Response to the Report of the President’s Working Group on Financial Markets by Chairman Jay Clayton

Summary - SEC Chairman Jay Clayton and several other high-level SEC staff members issued a public statement, SEC Response to the Report of the President’s Working Group on Financial Markets. This statement addresses the SEC’s response to the release by the President’s Working Group on Financial Markets of its Report on Protecting United States Investors from Significant Risks from Chinese Companies (PWG Report).

The SEC indicates that the PWG Report includes five recommendations for the agency that are centered on strengthening protections for investors and promoting the integrity of capital markets by:
  • Leveling the playing field for all companies listed on U.S exchanges; and
  •  Improving disclosure regarding, and consideration by fiduciaries and other market professionals of, the risks of investing in emerging markets, including China.

The statement indicates that SEC Chairman Clayton has “directed the SEC staff to prepare proposals in response to the report’s recommendations for consideration by the Commission and to provide assistance and guidance to investors and other market participants as may be necessary or appropriate. The SEC staff also stands ready to assist Congress with technical assistance in connection with any potential legislation regarding these matters.”

For more information, click here.

© 2020 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
Tax Updates
Final Regulations Released for Bonus Depreciation
By Tabitha Ford, Tax Senior, MaloneBailey, LLP

Summary -   The Treasury Department and the Internal Revenue Service recently released the last set of final regulations implementing the 100% additional first year depreciation deduction that allows businesses to write-off the cost of most depreciable business assets in the year they are placed in service by the business.

The 100% additional first year depreciation deduction was created in 2017 by the Tax Cuts and Jobs Act and generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture generally qualify. The deduction also applies to qualifying property (including used property) acquired and placed in service after Sept. 27, 2017. The final regulations provide clarifying guidance on the requirements that must be met for property to qualify for the deduction, including used property. The Treasury Department and the Internal Revenue Service also plan to issue procedural guidance for taxpayers to opt to apply the final regulations in prior taxable years or to rely on the proposed regulations issued in Sept. 2019

Specifically, these final regulations provide:

  1. The definition of qualified improvement property should include “made by the taxpayer”. An improvement is made by the taxpayer if the taxpayer makes, manufactures, constructs or produces the improvements for itself or if the improvement is made, manufactured, constructed or produced for the taxpayer by another person under a written contract.
  2. The terms “predecessor” and “class of property” is now defined as including a transferor of an asset to a transferee in a transaction in which the transferee’s basis in the asset is determined, in whole or in part, by reference to the basis of the asset in the hands of the transferor. The definition of predecessor is intended to be property specific. Similarly, the “class of property” was intended to be defined on a partner-specific basis.
  3. That eligible larger self-constructed property also includes property that is manufactured, constructed, or produced for the taxpayer by another person under a written contract that does not meet the definition of a binding contract under §1.168(k)-2(b)(5)(iii) of the 2019 Final Regulations (written non-binding contract) and that is entered into prior to the manufacture, construction, or production of the property for use by the taxpayer in its trade or business or for its production of income. For the large self-constructed property to be qualified under 168(k)(2), the property must be:
  4. MACRS property with 20-year or less recovery period, computer software, water utility property, or qualified improvement property
  5. Does not apply to qualified film, television, and live theatrical productions.
  6. Additionally, provides an election to treat certain components of larger self-constructed property as eligible for increased bonus percentage even if the construction of such larger self-constructed property began before September 28, 2017.
  7. A de minimis rule which provides that a taxpayer will be deemed not to have had a prior depreciable interest in a property and thus that property will be eligible for bonus depreciation in that taxpayer’s hands (assuming it otherwise qualifies) – if the taxpayer previously disposed of that property within 90 days of the date on which that property was originally placed in service.
  8. The treatment of an asset acquisition as part of a sale of a member of a consolidated group from one group to another and clarify the treatment of a series of related transactions.
  9. Also, the rules for consolidated groups have been moved from §1.168(k)-2(b)(3)(v) of the 2019 Proposed Regulations to new §1.1502-68 of these final regulations.

If you have questions on whether your property qualifies for 100% bonus depreciation, please feel free to contact our Senior Tax Manager, Nicole Zhao.
Extra Crunch
Virtual Panel Discussion: Small Businesses in the Public Markets

Summary - OTC Markets Group is offering a virtual panel discussion with the SEC's Office of the Advocate for Small Business Capital Formation.

Key topics included in the discussion are:
  • Capital raising
  • Becoming a publicly-traded company
  • Secondary trading
  • Reporting & disclosure

Panelists include:
  • Martha Miller, SEC Advocate for Small Business Capital Formation
  • Dan Zinn, General Counsel of OTC Markets Group (OTCQX: OTCM)
  • Steve Bagley, CFO of Sono-Tek Corp. (OTCQX: SOTK)
  • Robert Schermer, CEO of Meritage Hospitality Group, Inc. (OTCQX: MHGU)
  • Lauren Ranalli, President & CFO of First Resource Bank (OTCQX: FRSB)

For more information and to access the discussion, please click here.
About MaloneBailey, LLP
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