We are pleased to release MaloneBailey's October 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

• 2022 'Dirty Dozen' Tax Scams: What You Need to Know

Recent Accounting & Regulatory Updates



Recent FASB & AICPA Updates

• Life and Health Insurance Entities –New Edition of AICPA Audit and Accounting Guide Published 
• Unpaid Fees –AICPA Publishes New Technical Questions and Answers on Unpaid Fees 
• Tax Standards –AICPA Proposes Revisions to Tax Standards
• FASB Agenda –FASB Discusses Agenda Prioritization
• Segment Reporting –FASB Discusses Segment Reporting
• IFRS for SMEs –IASB Publishes Draft Third Edition of the IFRS for SMES Accounting Standard

Recent SEC & PCAOB Updates

• Auditor Independence and Ethical Responsibilities: Critical Points to Consider When Contemplating an Audit Firm Restructuring, Paul Munter, Acting Chief Accountant, Office of the Chief Accountant
• Release No. 34-95607: Pay Versus Performance
• Lead Auditors –SEC Approves PCAOB Standards for Lead Auditor’s Use of Other Auditors
• Audit Committees –PCAOB Issues 2022 Audit Committee Resource

Tax

• Inflation Reduction Act of 2022

Extra Crunch

• Journal of Accountancy Podcast: Key Takeaways from the AICPA Q3 2022 Business and Industry Economic Outlook Survey

About MaloneBailey, LLP

2022 'Dirty Dozen' Tax Scams: What You Need to Know

Summary - In June 2022, the Internal Revenue Service (IRS) releases its annual 'Dirty Dozen' scams list for the 2022 filing season. It serves as a warning to taxpayers to beware of bogus tax avoidance strategies. This month's featured podcast focuses on what taxpayers need to know for this year's filing season, what key areas of the list entail, what is being done to combat these schemes and what steps you can take to avoid becoming a victim to one of the scams.

Additional information about the 2022 'Dirty Dozen' list is available here.

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.

Life and Health Insurance Entities – New Edition of AICPA Audit and Accounting Guide Published

Summary - The AICPA has published a new edition of its Audit and Accounting Guide, Life and Health Insurance Entities. This guide was developed by the former Insurance Companies Committee and the Life Insurance Audit Guide Task Force to assist practitioners in performing and reporting on their audit engagements, and to assist management in the preparation of their financial statements in conformity with U.S. generally accepted accounting principles (GAAP) and statutory accounting practices.

This guide is being updated due to the revision of appendix A, “FASB ASU No. 2018-12, Financial Services: Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, Accounting Implementation Papers.” The implementation issue, Market Risk Benefits: Measurement Considerations, has been added. 

For more information, click here.

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

Investment in Tax Credit Structures – FASB Ratifies Consensus-for-Exposure

Summary - As reported in its “Summary of Board Decisions” publication, the FASB met on July 13, 2022, and ratified the consensus-for-exposure EITF 21-A, “Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” The FASB directed its staff to draft a proposed Accounting Standards Update (ASU) reflecting the consensus-for-exposure for vote by written ballot. 

For more information, click here.

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

Tax Standards – AICPA Proposes Revisions to Tax Standards

Summary - The AICPA has released an Exposure Draft proposing revisions to its Statements on Standards for Tax Services (SSTSs) and an Invitation to Comment (ITC). The comment deadline is December 31, 2022.

The proposed changes to the SSTSs include revisions to the existing standards as well as three new standards. Additionally, the invitation to comment requests feedback on the subject of quality management in tax. The combined document is divided into two separate sections, with the exposure draft of the proposed new standards in part one, and the invitation to comment on the subject of quality management in tax in part two.

Part One: Proposed New Standards

If adopted as proposed, in addition to inclusion of three new standards, the amendments to the SSTSs would reorganize the tax standards to provide what the Exposure Draft describes as “a new practice-based organizational structure for the standards.” The Exposure Draft sets out this new framework as follows:

• Standard 1, which provides “general tax guidance,” including “new standards on data protection and reliance on tools;”
• Standard 2, which “includes tax return preparation guidance;”
• Standard 3, which provides guidance relating to provision of tax advice; and
• Standard 4, which is a new standard for “members providing tax representation services.”

Part Two: Invitation to Comment

The ITC includes proposals for quality management in tax practice. The introduction to the ITC notes that discussions on the topic gave rise to a “resonating theme … defined as a proactive, risk-based, scalable approach to ensure that an individual or firm possesses the necessary competence to practice.”

The ITC is separate from the proposed SSTSs and has been issued for consideration and discussion. The proposals in the ITC are not expected to be adopted with the proposed SSTS amendments, because of the likelihood that they will require additional research and investigation, depending on the comments received.

Effective Date for SSTS Amendments

The AICPA expects that the proposed SSTSs, if adopted, will be approved by May 31, 2023, and effective January 1, 2024. 

For more information, click here.

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

FASB Agenda – FASB Discusses Agenda Prioritization

Summary - As reported in its “Summary of Decisions” publication, the FASB met on August 31, 2022 and discussed the results of staff research and analysis on an agenda request that highlights a perceived lack of certain disclosures related to the use of bank credit and services. The FASB decided not to add a project to its technical agenda. 

For more information, click here.

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

Segment Reporting – FASB Discusses Segment Reporting

Summary - As reported in its “Summary of Decisions” publication, the FASB met on July 27, 2022 and discussed feedback from the external review of the staff draft of the proposed Accounting Standards Update (ASU). The FASB also discussed two potential disclosures and a sweep issue that was identified from the external review of the staff draft.

The FASB reached a number of decisions, including the following:

• Require that a public entity disclose the title and position of its Chief Operating Decision Maker (CODM).
• A public entity should disclose the nature of the expense information that the CODM uses to manage operations if the entity does not disclose significant expense categories and amounts under the significant expense principle for one or more of its reportable segments.
• To permit a public entity to report multiple measures of a segment’s profit or loss.

For more information, click here.

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

IFRS for SMEs – IASB Publishes Draft Third Edition of the IFRS for SMES Accounting Standard

Summary - The IASB has published for public comment and Exposure Draft, Third Edition of the IFRS for SMES Accounting Standard. This proposal reflects improvements made to full IFRS Accounting Standards, while keeping the standard suitable for small and medium-sized entities. The IASB’s proposals include updating the principles of the standard to align to those of The Conceptual Framework for Financial Reporting issued in 2018 and simplified requirements based on IFRS 13, Fair Value Measurement and IFRS 15, Revenue from Contracts with Customers.

The IASB is also proposing to update the standard for new requirements in IFRS 3, Business Combinations, IFRS 9, Financial Instruments, IFRS 10, Consolidated Financial Statements and IFRS 11, Joint Arrangements. The proposed updates include other improvements made to full IFRS Accounting Standards since the second edition of IFRS for SMEs Accounting Standard was published in 2015.

Comments on the proposal are due March 7, 2023.

For more information, click here.

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

Auditor Independence and Ethical Responsibilities: Critical Points to Consider When Contemplating an Audit Firm Restructuring, Paul Munter, Acting Chief Accountant, Office of the Chief Accountant

Summary - The SEC’s Acting Chief Accountant, Paul Munter, recently discussed auditor independence and ethical responsibility considerations in the context of audit firm restructuring transactions. Munter indicates that the SEC’s Office of the Chief Accountant (OCA) has observed “audit firms exploring the sale of a portion of their business to an external party while retaining an equity interest or other form of continuing involvement in that business, or divesting all or portions of the accounting firm’s consulting practice to a third-party entity. While such contemplated sale and divestiture deals are not new, in the view of OCA staff, complex transactions with investors that are not traditional accounting firms, and have not previously been subject to the same independence and ethical responsibilities, elevate the risk to an auditor’s independence with respect to its audit clients. In these complex practice structures and divestitures, it is paramount that the accounting firm fully understands its responsibility for maintaining auditor independence and it discloses such requirements to the non-accounting firm investors involved in the transaction so that the accounting firm can obtain the information necessary to fulfill its responsibilities.”

OCA has observed that recent contemplated transactions by accounting firms may involve private equity or other investment structures purchasing ownership interests in the accounting firm. Munter cautions that, ‘When an accounting firm is considering obtaining an investment from a private equity or other investment structure, each entity within such structure would need to be carefully evaluated to determine if the entity is an ‘associated entity’ and is therefore part of the accounting firm for purposes of assessing potential impacts on, among other things, compliance with the Commission’s auditor independence requirements.”

Munter discussed the following broad topics in relation to auditor independence considerations related to audit firm restructuring transactions:

• OCA staff observations related to these transactions;
• Additional challenges from private equity investment; and
• Divestiture of a portion of a business.

Munter reminds accountants of the requirement to be independent in both fact and appearance, and when auditor independence is a close-to-the-line call, accounting firms need to have a strong culture and tone at the top that prioritizes independence and ethical responsibilities above all else.

For more information, click here.

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

Release No. 34-95607: Pay Versus Performance

Summary - The SEC adopted amendments to its rules to require registrants to disclose information reflecting the relationship between executive compensation actually paid by a registrant and the registrant’s financial performance. The rules implement a requirement mandated by the Dodd–Frank Wall Street Reform and Consumer Protection Act. The SEC proposed pay versus performance disclosure rules in 2015 and reopened the comment period on the proposal in January 2022.

The SEC indicates that the “amendments require registrants to provide a table disclosing specified executive compensation and financial performance measures for their five most recently completed fiscal years. With respect to the measures of performance, a registrant will be required to report its total shareholder return (TSR), the TSR of companies in the registrant's peer group, its net income, and a financial performance measure chosen by the registrant.” Registrants will be required to describe the relationships between the executive compensation actually paid and each of the performance measures, as well as the relationship between the registrant’s TSR and the TSR of its selected peer group. A registrant will also be required to provide a list of three to seven financial performance measures that it determines are its most important performance measures for linking executive compensation actually paid to company performance. Smaller reporting companies will be subject to scaled disclosure requirements under the rules.

The final rules will become effective 30 days following publication of the release in the Federal Register. Registrants must begin to comply with the new disclosure requirements in proxy and information statements that are required to include Item 402 executive compensation disclosure for fiscal years ending on or after December 16, 2022.

For more information, click here.

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

Lead Auditors –SEC Approves PCAOB Standards for Lead Auditor’s Use of Other Auditors

Summary - The SEC has approved the Public Company Accounting Oversight Board’s (PCAOB’s) amended standards for audits that involve multiple audit firms. The amendments specify certain procedures for lead auditors to perform when planning and supervising other auditors and require lead auditors to prioritize their supervisory activities of other auditors around higher-risk areas in the audit.

The amendments apply to all audits conducted under PCAOB standards and will take effect for audits of financial statements for fiscal years ending on or after December 15, 2024. 

For more information, click here.

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

Audit Committees – PCAOB Issues 2022 Audit Committee Resource

Summary - The PCAOB released a new publication on August 17, Audit Committee Resource. It provides a reference for auditors, audit committees, investors, and other stakeholders. It offers questions for public company audit committees to consider for discussion with their auditors, including how auditors are responding to financial reporting and audit risks in the current economic environment.

The publication highlights the following areas:

• Fraud and other risks;
• IPOs and M&A activity;
• Audit execution;
• Independence;
• Firms’ quality control systems; and
• Technology (auditing digital assets, responding to cyber threats, and use of data and technology in the audit). 

For more information, click here.

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

Inflation Reduction Act of 2022

On August 16, 2022, President Joe Biden signed the Inflation Reduction Act of 2022 into law. The Act provides investment in clean energy, promotes reductions in carbon emissions, and extends popular Affordable Care Act premium reductions. The Inflation Reduction Act is the successor to the House-passed Build Back Better Act of late 2021 and has been touted by President Biden to help reduce the country’s crippling inflation. Let’s explore some of the tax changes caused by the Inflation Reduction Act of 2022.

Major Tax Provisions

Corporate and International Taxes

• Effective for tax years beginning after 2022, imposes a 15 percent minimum tax on corporate book income for corporations with gross revenue exceeding $1 billion.
• The Act includes a 1 percent excise tax on stock repurchases by domestic corporations whose stock trades on an established securities market.

Individual Income Taxes

• The excess business loss limitation that applies to partnerships and S corporations has been extended an additional two years through 2028.
• The credit for nonbusiness energy property is modified and extended through 2032.
• This credit applies to energy efficient windows and doors, certain HVAC systems and heat pumps, and the lifetime maximum for the credit is replaced with an annual limit of $1,200.
• The credit for the purchase of plug-in electric vehicles and fuel cell vehicles is extended through 2032.
• Eliminates the current credit’s limitation on the number of vehicles produced by a certain manufacturer.
• New credit requires final assembly of the vehicle in North America and also phases in sourcing requirements for critical components of the vehicle and battery system.
• Maximum credit remains at $7,500 but includes income limitations as well as limitations on the manufacturer’s suggested retail price.
• New credit of up to $4,000 is available for the purchase of a previously-owned clean vehicle.
• Credit of up to 30 percent of the basis of a qualified commercial clean vehicle.

Additional Tax Provisions

Research Credit for Small Businesses – Currently, certain qualified small businesses are allowed to claim a research credit against payroll taxes. With the implementation of the Inflation Reduction Act, the limitation for the credit is increased from $250,000 to $500,000 in tax years beginning after 2022.

Electricity Produced from Renewable Resources – The Act extends the credit for electricity produced from certain renewable resources through 2024. An increased credit can be claimed if the entity meets certain workforce and wage requirements in construction or operation of the facility.

Elective Direct Payment – In lieu of a tax credit, entities can elect to claim a direct payment for certain energy projects. These include the alternative fuel refueling property credit, the renewable electricity production credit, the carbon oxide sequestration credit, the energy investment tax credit, and the qualifying advanced energy project credit.



IRS Funding

One of the ways to fund a large legislative package is by improving IRS service to close the “tax gap”. The tax gap is the difference between what should be collected by the IRS and what is actually collected by the IRS. The Act looks to close the tax gap by allocating an increased amount to the IRS to improve enforcement. There are no changes to the Internal Revenue Code to implement this improvement in IRS enforcement. This provision only increases the IRS budget, so there is no direct impact on taxpayers.

If you have any additional question, please feel free to contact Nicole Zhao, Tax Partner, at nzhao@malonebailey.com.

Journal of Accountancy Podcast: Key Takeaways from the AICPA Q3 2022 Business and Industry Economic Outlook Survey

The Journal of Accountancy podcast features the September 1, 2022 podcast on the release of the AICPA Q3 2022 Business and Industry Economic Outlook Survey. Among the themes covered in the discussion, the podcast focuses on inflation as a top concern, IRS and PCAOB news, and cyber insurance information.

To podcast episode, please click here.