We are pleased to release MaloneBailey's April 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

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Featured Podcast

• FASB – What to Keep in Mind for 2023

Recent Accounting & Regulatory Updates



Recent FASB & AICPA Updates

• Leases –FASB Discusses Common Control Arrangements   
• AICPA Standards –AICPA’s ASB Releases SAS 149  
• AICPA Standards –AICPA’s ASB Releases SQMS 3  
• Service Organizations –New Edition of AICPA Audit and Accounting Guide Published 
• Income Taxes –FASB Proposes Enhancements to Income Tax Disclosures  

Recent SEC & PCAOB Updates

• Cybersecurity –SEC Proposes New Requirements to Address Cybersecurity Risks to the U.S. Securities Markets  
• Cybersecurity Risk Management –SEC Reopens Comment Period for Proposed Cybersecurity Risk Management Rules and Amendments for Registered Investment Advisers and Funds 
• Proof of Reserve Reports –PCAOB Investor Advocate Cautions on Third-Party Verification/Proof of Reserve Reports  
• Release No. 34-96906: The Commission’s Privacy Act Regulations
• Release No. 33-11159: Extending Form 144 EDGAR Filing Hours 
• Release No. 34-96930: Shortening the Securities Transaction Settlement Cycle 

Tax

• IRS Amends Code Section 174

Extra Crunch

• OTC Markets – 2022 Annual Market Review

About MaloneBailey, LLP

FASB: What to Keep in Mind for 2023

Summary - In this episode of Everybody Counts, Caroline Rosen, Marketing and Communications Manager, and Collins Ncho, Audit Manager discuss what to be mindful of in 2023 in terms of FASB guidance.

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.

Leases –FASB Discusses Common Control Arrangements 

Summary - As discussed in its “Summary of Decisions” publication, the FASB met on February 15, 2023, and redeliberated the proposed Accounting Standards Update, Leases (Topic 842): Common Control Arrangements, and reached a number of decisions, including that for arrangements between entities under common control, the FASB affirmed its decision to provide entities within the scope of paragraph 842-10-65-1(b) (that is, entities that are not public business entities, not-for-profit bond obligors, or employee benefit plans that file or furnish financial statements with or to the U.S. Securities and Exchange Commission) with a practical expedient to use written terms and conditions for: (1) determining whether a lease exists and, if so, (2) the classification and accounting for that lease.

The FASB reached a number of other decisions which are outlined in the Summary of Decisions.

For more information, click here.

© 2023 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

AICPA Standards –AICPA’s ASB Releases SAS 149

Summary - The AICPA’s Auditing Standards Board (ASB) has released Statement on Auditing Standards (SAS) No. 149, Special Considerations — Audits of Group Financial Statements (Including the Work of Component Auditors and Audits of Referred-to Auditors), and Statement on Quality Management Standards (SQMS) No. 3, Amendments to QM Sections 10, A Firm’s System of Quality Management, and 20,Engagement Quality Review. The ASB developed SAS 149 to provide “a risk-based approach to planning and performing a group audit.” SAS 149 supersedes SAS No. 122, Statements on Auditing Standards: Clarification and Recodification, section 600, Special Considerations ⎯ Audits of Group Financial Statements (Including the Work of Component Auditors. It also includes conforming amendments to other standards. SAS 149 applies to an audit of group financial statements (a group audit) and to all group audits. It also “addresses special considerations that apply to a group audit, including in circumstances in which component auditors are involved or when the group auditor makes reference to the audit of a referred-to auditor.

As noted in the At-a-Glance document issued with SAS 149 and SQMS 3, New Statement on Auditing Standards for Group Audits, the “most significant change introduced by SAS No. 149 is that it provides a risk-based approach to planning and performing a group audit.” While former AU-C section 600 required the identification of “significant components at which to perform audit work,” SAS 149 “directs the group auditor to use professional judgment in determining the components at which to perform procedures, based on assessed risks. The ASB also intends SAS 149 to “better [align] the standard with other recently issued SASs and [clarify] the interaction between the SAS and other AU-C sections.

SAS 149 also provides a definition of the new term, “referred to auditor,” which includes: “an auditor who performs an audit of the financial statements of a component to which the group engagement partner determines to make reference in the auditor’s report on the group financial statements.” The referred to auditor is not a component auditor or a part of the engagement team for a group audit. In contrast, a component auditor is a part of the engagement team.

Effective Dates

SAS 149 is effective for audits of group financial statements for periods ending on or after December 15, 2026.

For more information, click here.

© 2023 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

AICPA Standards –AICPA’s ASB Releases SQMS 3 

Summary - The AICPA’s Auditing Standards Board (ASB) has released Statement on Quality Management Standards (SQMS) No. 3, Amendments to QM Sections 10, A Firm’s System of Quality Management, and 20,Engagement Quality Review. The ASB has issued SQMS 3 concurrently with SAS 149. SQMS 3 amends QM Sections 10 and 20 to conform terminology to the language in SAS 149 “and provide guidance on differentiating between a resource and an information source.

The amendment to QM section 10 is effective concurrently with a firm’s implementation of SQMS Nos. 1 and 2 on December 15, 2025. The amendment to QM section 20 is effective for (a) audits or reviews of financial statements for periods beginning on or after December 15, 2025, and (b) other engagements in the firm’s accounting and auditing practice beginning on or after December 15, 2025.

Service Organizations –New Edition of AICPA Audit and Accounting Guide Published 

The AICPA has published a new edition of its Audit and Accounting Guide, Reporting on an Examination of Controls at a Service Organization Relevant to User Entities' Internal Control Over Financial Reporting (SOC 1®). This publication has been developed by the AICPA Service Organizations Guide Task Force to assist practitioners engaged to examine and report on controls at a service organization that are likely to be relevant to user entities’ internal control over financial reporting.

This edition of the guide has been revised by AICPA staff to include certain changes necessary due to the issuance of authoritative guidance since the guide was originally issued and other revisions as deemed appropriate. Relevant attestation guidance issued through September 1, 2022, has been considered in the development of this edition of the guide. This means that in updating this guide, all guidance issued up to and including SSAE No. 22, Review Engagements, was considered, but not necessarily incorporated, as determined based on applicability. 

For more information, click here.

© 2023 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Service Organizations – New Edition of AICPA Audit and Accounting Guide Published 

Summary - The AICPA has published a new edition of its Audit and Accounting Guide, Reporting on an Examination of Controls at a Service Organization Relevant to User Entities' Internal Control Over Financial Reporting (SOC 1®). This publication has been developed by the AICPA Service Organizations Guide Task Force to assist practitioners engaged to examine and report on controls at a service organization that are likely to be relevant to user entities’ internal control over financial reporting.

This edition of the guide has been revised by AICPA staff to include certain changes necessary due to the issuance of authoritative guidance since the guide was originally issued and other revisions as deemed appropriate. Relevant attestation guidance issued through September 1, 2022, has been considered in the development of this edition of the guide. This means that in updating this guide, all guidance issued up to and including SSAE No. 22, Review Engagements, was considered, but not necessarily incorporated, as determined based on applicability. 

For more information, click here.

© 2023 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Income Taxes –FASB Proposes Enhancements to Income Tax Disclosures 

Summary - The FASB has released for public comment the proposed Accounting Standards Update (ASU), Income Taxes (Topic 740) – Improvements to Income Tax Disclosures. The proposed ASU addresses requests for improved income tax disclosures from investors, lenders, creditors, and other allocators of capital (collectively, “investors”) that use the financial statements to make capital allocation decisions. The comment deadline is May 30, 2023.

Improving Understandability of the Tax Provision

During the FASB’s 2021 agenda consultation process and other stakeholder outreach, investors expressed concerns that existing income tax disclosures do not provide sufficient information to understand the tax provision for an entity that operates in multiple jurisdictions. Investors currently rely on the rate reconciliation table and other disclosures, including total income taxes paid in the statement of cash flows, to evaluate income tax risks and opportunities. While investors told FASB that they generally find these disclosures helpful, they suggested possible enhancements to better (a) understand an entity’s exposure to potential changes in jurisdictional tax legislation and the ensuing risks and opportunities, (b) assess income tax information that affects cash flow forecasts and capital allocation decisions, and (c) identify potential opportunities to increase future cash flows.

The proposed amendments would address investor requests for more transparency about income tax information, including jurisdictional information, by requiring:

• Consistent categories and greater disaggregation of information in the rate reconciliation; and
• Income taxes paid disaggregated by jurisdiction.

Effective Dates

The FASB will determine the effective date and whether early adoption of the amendments is permitted after it considers stakeholder feedback on the proposed amendments. The proposed amendments would be applied retrospectively. 

For more information, click here.

© 2023 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Cybersecurity –SEC Proposes New Requirements to Address Cybersecurity Risks to the U.S. Securities Markets 

Summary - The SEC has proposed for public comment proposed requirements for broker-dealers, clearing agencies, major security-based swap participants, the Municipal Securities Rulemaking Board, national securities associations, national securities exchanges, security-based swap data repositories, security-based swap dealers, and transfer agents (collectively, “Market Entities”) to address their cybersecurity risks.

The proposal would require all Market Entities to implement policies and procedures that are reasonably designed to address their cybersecurity risks and, at least annually, review and assess the design and effectiveness of their cybersecurity policies and procedures, including whether they reflect changes in cybersecurity risk over the time period covered by the review. The proposal, through new notification requirements applicable to all Market Entities and additional reporting requirements applicable to Market Entities other than certain types of small broker-dealers (collectively, “Covered Entities”), would improve the SEC’s ability to obtain information about significant cybersecurity incidents affecting these entities. Further, new public disclosure requirements for Covered Entities would improve transparency about the cybersecurity risks that can cause adverse impacts to the U.S. securities markets.

The public comment period will remain open until 60 days after the date of publication of the proposing release in the Federal Register.

For more information, click here.

© 2023 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Cybersecurity Risk Management –SEC Reopens Comment Period for Proposed Cybersecurity Risk Management Rules and Amendments for Registered Investment Advisers and Funds 

Summary - The SEC has reopened the comment period on proposed rules and amendments related to cybersecurity risk management and cybersecurity-related disclosure for registered investment advisers, registered investment companies, and business development companies that were proposed by the SEC on February 9, 2022.



The SEC indicates that the “reopened comment period will allow interested persons additional time to analyze the issues and prepare comments in light of other regulatory developments, including whether there would be any effects of other Commission proposals related to cybersecurity risk management and disclosure that the Commission should consider.”

The comment period will remain open until 60 days after the date of publication of the reopening release in the Federal Register. 

For more information, click here.

© 2023 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Proof of Reserve Reports –PCAOB Investor Advocate Cautions on Third-Party Verification/Proof of Reserve Reports 

Summary - The PCAOB’s Office of the Investor Advocate issued Investor Advisory: Exercise Caution With Third-Party Verification/Proof of Reserve Reports (POR Reports). The Office of the Investor Advocate is aware of some service providers, including PCAOB-registered audit firms, issuing PoR Reports to certain crypto entities (e.g., crypto exchanges, stablecoin issuers). Crypto entities may engage a service provider to issue a PoR Report to reassure customers in response to concerns about the type of reserve holdings or the safety and availability of customers’ digital assets if some or all of the customers decide to withdraw their assets. The Advisory states, “Proof of reserve reports are inherently limited, and customers should exercise extreme caution when relying on them to conclude that there are sufficient assets to meet customer liabilities.

PoR engagements are not subject to PCAOB inspection. The PCAOB is concerned investors and others may place undue reliance on the reports. Despite any representations to the contrary, the PCAOB notes PoR Reports are not equivalent or more rigorous than an audit, are not conducted in accordance with PCAOB auditing standards, and do not provide any meaningful assurance to investors or the public.

In addition, there is a lack of uniformity in service providers that perform PoR engagements, because some PoR engagements are performed by accounting firms and others are performed by non-accountant assurance providers. Management of the crypto entities has discretion on whether the results of PoR reports are made public and the extent and format of the information provided.

The Advisory states that, in general, PoR Reports provide an asset verification for an asset type at a particular moment in time, subject to significant limitations based on the procedures performed. Also, because PoR Reports concern digital assets at one point in time, they do not provide any assurance about whether the assets were used, loaned, or otherwise became unavailable to customers after issuance of the PoR Report, that reserves will be adequate, or that customer assets will be protected. PoR Reports also provide no assurance regarding the effectiveness of internal controls or governance of the crypto entity.



For more information, click here.

© 2023 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Release No. 34-96906: The Commission’s Privacy Act Regulations

Summary - The SEC has proposed for public comment a rule that would revise the agency’s regulations under the Privacy Act. The SEC indicates that the “Privacy Act is the principal law governing the handling of personal information in the federal government.” The current rules provide procedures for making Privacy Act requests, including requests for access to and amendment of records pertaining to the individual making the request. The revisions will clarify, update, and streamline the language of several procedural provisions.

The proposed revisions would codify current practices for processing requests made by the public under the Privacy Act. This would provide greater clarity regarding the SEC’s process for how individuals can access information pertaining to themselves. Due to the scope of the revisions, the proposed rule would replace the SEC’s current Privacy Act regulations in their entirety.

If adopted, the proposed rule would revise procedural and fee provisions, as well as eliminate unnecessary provisions. The proposed rule would also allow for electronic methods to verify one’s identity and to submit Privacy Act requests.

The public comment period will remain open until April 17, 2023, or until 30 days following publication of the proposing release in the Federal Register, whichever is later.



For more information, click here.

© 2023 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Release No. 33-11159: Extending Form 144 EDGAR Filing Hours

Summary - The SEC announced that it has amended Regulation S-T to extend the filing deadline for Forms 144 filed electronically from 5:30 p.m. to 10:00 p.m., Eastern Standard Time or Eastern Daylight Saving Time, whichever is currently in effect, on SEC business days. The SEC also issued technical amendments to enhance the consistency of recently revised provisions related to the filing format of Form 144. The new filing deadline and other amendments are effective on March 20, 2023, and the Form 144 electronic filing requirement will begin on April 13, 2023.

In addition, as of April 13, 2023, the SEC’s Division of Corporation Finance’s Statement Regarding Requirements for Form 144 Paper Filings in Light of COVID-19 Concerns (June 25, 2020) will no longer be in effect and Forms 144 will no longer be accepted via email. After that time, Forms 144 that relate to the sale of securities of issuers not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act must be filed in paper.



For more information, click here.

© 2023 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Release No. 34-96930: Shortening the Securities Transaction Settlement Cycle

Summary - The SEC adopted rule changes to shorten the standard settlement cycle for most broker-dealer transactions in securities from two business days after the trade date (T+2) to one (T+1). The SEC indicates that the “final rule is designed to benefit investors and reduce the credit, market, and liquidity risks in securities transactions faced by market participants.”

In addition to shortening the standard settlement cycle, the final rules will improve the processing of institutional trades. Specifically, the final rules will require a broker-dealer to either enter into written agreements or establish, maintain, and enforce written policies and procedures reasonably designed to ensure the completion of allocations, confirmations, and affirmations as soon as technologically practicable and no later than the end of trade date. The final rules also require registered investment advisers to make and keep records of the allocations, confirmations, and affirmations for certain securities transactions.

Further, the final rules add a new requirement to facilitate straight-through processing, which applies to certain types of clearing agencies that provide central matching services. The final rules will require central matching service providers to establish, implement, maintain, and enforce new policies and procedures reasonably designed to facilitate straight-through processing and require them to submit an annual report to the SEC that describes and quantifies progress with respect to straight-through processing.

The final rules will become effective 60 days after publication in the Federal Register. The compliance date for the final rules is May 28, 2024.

For more information, click here.

© 2023 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

IRS Amends Code Section 174

Written by Travis Moffett, Tax Manager

For tax years beginning in 2022, the IRS has amended Internal Revenue Code Section 174 to require the capitalization of research and experimentation (R&E) expenses. Historically, taxpayers were allowed to deduct current year R&E expenditures on their tax return. However, under the Tax Cuts and Jobs Act, these expenses must now be capitalized and amortized for a period of 60 months using a half-year convention in the tax year that these costs were paid or incurred. Reforms may still come later this year, but until Congress passes legislation, companies will have to apply the current version of section 174.

What has changed?

Under the new version of section 174, research and experimental expenses must be capitalized and amortized over a 5 or 15-year period, depending on the location where the research takes place. The relevant costs specified include software development, rent, computer supplies, repairs and maintenance, depreciation and other traditional research and experimental costs. This affects every taxpayer regardless of whether they take advantage of the research credit.

Section 41 vs Section 174

Internal Revenue Code Section 41 governs the rules for the application of the research and development credit. To qualify for the research credit, the taxpayer must have qualified research expenses that meet the following requirements:

1. Expenditures must relate to a new or improved function, performance, reliability, or quality of a business component.
2. Expenditures must be incurred as part of a process of experimentation designed to evaluate one or more alternatives to achieve a result where the capability or the method of achieving that result, or the appropriate design of that result, is uncertain as of the beginning of the taxpayer’s research activities.
3. Expenditures must be technological in nature meaning that the process of experimentation relies on the physical or biological sciences, engineering, or computer sciences.
4. Expenditures must be incurred for research that is undertaken for the purpose of discovering information intended to eliminate uncertainty concerning the development or improvement of a business component.

These section 41 expenditures are limited to domestic jurisdictions but section 174 includes both domestic and foreign costs. Also, section 174 includes a much wider range of expenses (including software development costs). Whereas, section 41 costs are limited to salaries and wages, supplies, and contract research.

Final Thoughts

Now that section 174 costs have been given a more unfavorable treatment, the section 41 research credit will have more value than ever to potentially offset additional taxable income. In addition, the IRS has published Revenue Procedures 2023-8 and 2023-11 to address such things as procedural guidance, automatic method change, and audit protection. Taxpayers should consult their tax advisors to review their circumstances and determine the best course of action.

For more information, please contact Nicole Zhao, Tax Partner: nzhao@malonebailey.com. 

OTC Markets – 2022 Annual Market Review

Summary - OTC Markets has issued its 2022 Annual Market Review, which according to its website, highlights "markets, including important milestones, recent acquisitions, regulatory updates and more."

To review the complete report, please click here.