Update:

SEC: 404(b) Comment Period Ends

The 60-day comment period on the SEC proposal to amend its definitions of large accelerated filer and accelerated filer has closed, and not surprisingly, the SEC received abundant response from the business sector, accounting industry and investor groups.

As a quick recap, on May 9, 2019, the SEC voted to:

• Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be a Smaller Reporting Company (SRC) and had no revenues or annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available.
• Increase the transition thresholds for accelerated and large accelerated filers becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million.
• Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status.

A major impact of the proposed amendments would be to eliminate the requirement for Smaller Reporting Companies (SRCs) to obtain an attestation of their internal control over financial reporting (ICFR) from an independent outside auditor. This comes on the heels of an SEC change last year that revised the SRC definition, which opened the category to more companies, but did not address the attestation requirement at that time. That left some companies categorized as both SRCs and accelerated or large accelerated filers still requiring ICRF attestation.

At the time the Commission revised the SRC definition, the Chairman directed the staff to formulate recommendations that would appropriately redefine the issuers that are designated as accelerated filers in order to promote capital formation, and consider how the rule change could reduce compliance costs for certain registrants, while maintaining appropriate investor protections.

“Investors in these lower-revenue companies will benefit from more tailored control requirements. Many of these smaller companies – including biotech and health care companies will be able to redirect the savings into growing their companies by investing in research and human capital,” said SEC Chairman Jay Clayton.

The proposed amendments would not change key protections of the Sarbanes-Oxley Act of 2002, such as independent audit committee requirements, CEO and CFO certifications of financial reports, or the requirement that companies continue to establish, maintain, and assess the effectiveness of their ICFR.

The 60-day comment period following the SEC’s affirmative vote generated considerable response from vested interests on both sides.

Predictably, most accounting firms that could lose lucrative attestation business stood in opposition, but they stepped ever so lightly in their arguments against a proposal that the SEC Chairman had championed and the Commission voted to support.

As an example, Big 4 Deloitte & Touche tactfully wrote that “because of the demonstrated benefits of Section 404(b), we do not believe it would be prudent to roll back existing requirements for a large population of issuers… we recognize, however, that in fulfilling its mission, the SEC must consider whether the investor protection mechanisms of the safeguard may be less critical — or even serve as a barrier to entry — for some companies.”

Big 4 KPMG’s non-combative comments included: “We believe that amendments to the definitions of accelerated and large accelerated filer should maintain clear and discernible filer categories. In our view, the proposed changes do not add additional complexity to current filer categories because the amendments simply change the boundaries at which these two categories are set. We encourage the Commission to consider further opportunities to simplify the number of filer categories for the benefit of all stakeholders.”

Several consumer and institutional investor groups weighed in with more strongly worded opposition:

The Council of Institutional Investors (CII) wrote: “We believe the Proposed Rule amendments allowing low-revenue issuers to avoid the ICFR auditor attestation requirement could significantly affect the ability of investors to make informed investment decisions because it would substantially impact the quality of financial reporting by those issuers.”

The Consumer Federation of America (CFA) wrote that there was not any “credible support” for the claim that the proposed change would promote capital formation, and challenged the assertion that it would help small companies.

On the other side, commenting in favor of the SEC proposal were business and industry groups:

The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC) voiced its support by citing agreement with “the SEC’s stated objective to promote capital formation for smaller reporting issuers without significantly affecting the ability of investors to make informed investment decisions based on the financial reporting of those issuers.” The group added particular praise for the SEC proposing a revenue-only test and not using a public float test that would still have required some pre-or low-revenue companies with high valuations to still have auditor attestation.

Joining the pro side was the National Association of Manufacturers (MAM), the largest manufacturing trade association in the United States, which wrote that they applaud the SEC for seeking to right-size the regulatory burdens faced by these emerging companies, while continuing to provide appropriate protections for investors. It further encouraged the SEC to go further and “fully align the non-accelerated filer definition with the smaller reporting company (SRC) definition rather than limiting the scope of the proposed rule just to a subset of SRCs.”

The Independent Community Bankers of America (ICBA) also weighed in and voiced its support, but further suggested that the SEC should go further to exempt community banks, which it said were already subject to banking regulations and supervision, and their internal controls are evaluated regularly as part of their safety and soundness exams.

With the comment period closed, it now moves back to the SEC for further action.

Relief on the way

FASB Votes to Delay Standards

The Financial Accounting Standards Board (FASB) voted to propose delaying the implementation timelines of four standards, providing extra time for privately-held companies, non-profit organizations, and smaller reporting companies.

FASB staff will now prepare exposure drafts with new effective dates for Lease Accounting, Credit Losses, Derivatives/Hedging, and Long-duration Insurance Contracts. This will be followed by a 30-day comment period.

Currently, the FASB provides privately-held companies and non-profits an additional year to implement a new standard under the justification that most private and non-public entities lack the time and resources to face the challenges of implementing complex new standards. Most importantly, the extra time provides an opportunity to learn from implementation issues described in large public company filings and SEC comment letters.

This new proposal will give privately-held companies and non-profits an extra two years, instead of just one. For the Credit Loss Accounting Standard, SRCs (with annual revenue under $100 million or a public float below $250 million) would also get a two-year timeline.

The relief comes after a flurry of new and complex FASB standards.

FASB’s proposals include changes for:

• Lease accounting: The new effective date for calendar-year-end preparers that are not public business entities would be Jan. 1, 2021. The effective date for calendar-year-end public business entities, employee benefit plans, and not-for-profit conduit bond obligors is Jan. 1, 2019, and would remain unchanged.
• Accounting for credit losses: The effective date for calendar-year-end SEC filers, excluding smaller reporting companies as defined by the SEC, would remain Jan. 1, 2020. The new effective date for all other calendar-year-end entities would be Jan. 1, 2023. This change would extend the effective date for smaller reporting companies, private companies, and other non-SEC filers. The proposed change would treat smaller reporting companies like SEC emerging growth companies for purposes of the standard.
• Derivatives and hedging: The effective date for calendar-year-end public business entities is Jan. 1, 2019, and would remain unchanged. The new effective date for calendar-year-end preparers that are not public business entities would be Jan. 1, 2021, a one year extension.
• Long-duration insurance contracts: The new effective dates would be Jan. 1, 2022, for calendar-year-end public business entities and Jan. 1, 2024, for all other entities with a calendar year end.                                                                               {Source: Journal of Accountancy}

CECL

FASB Vote Will Benefit Some Banks

In a significant move, the FASB voted to propose a delay for the implementation of the Current Expected Credit Loss Standard (CECL) until January 2023 for certain companies (see story above). The delay would apply to smaller reporting companies (SRCs), non-SEC public companies and private companies, reports the ABA Banking Journal.

“FASB’s vote to delay CECL for certain smaller banks offers further proof that the required efforts to implement this costly standard are far greater than the board has previously led bankers to believe,” said American Bankers Association President and CEO Rob Nichols. He noted with concern, however, that the delay would not apply to all banks or larger public companies.

Nichols called on the FASB to apply the delay to banks of all sizes and use the additional time to “conduct a rigorous quantitative impact study to properly assess the effect this new standard will have on their ability to serve their customers and the broader economy.” He added that “a partial delay without a requirement for study or reconsideration simply kicks the can down the road – it does not reduce the ongoing data, modeling and auditing requirements facing smaller banks.” He reiterated ABA’s call for congressional leaders to act to delay CECL’s implementation.

As background, the FASB issued its Current Expected Credit Loss (CECL) standard on June 16, 2016, with implementation scheduled to begin January 2020. The new standard affects banks and a broad part of the business sector, including companies that engage in lending, big and small.

CECL replaces the current GAAP impairment model which is based on incurred losses, and where investments are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms.

Instead, under CECL, a lender will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss from inception and continuing over the life of a loan.

CECL has been the object of heavy criticism by the banking/financial industry as well as business groups, and there are bipartisan supported “stop and study” bills moving through both houses of congress to delay its implementation.

A case of scheme vs. sham?

States Sue Feds Over Blocked Tax Workarounds

Last June the Internal Revenue Service and the Treasury Department issued final rules blocking attempts by some states to work around the new $10,000 cap for state and local tax deductions.

After the Tax Cuts and Jobs Act (JOBS) passed, elected leaders of several states, including New York, New Jersey and Connecticut, angrily pledged to reduce the heavy tax burden on their residents. No, they were not talking about their own chart-topping state and local taxes. They were seeking a way around the federal cap on deducting those state and local taxes on the federal tax return.

Although advised early by the IRS and Treasury Department against such workaround schemes, those states proceeded to enact legislation that would allow municipalities to create charitable funds to pay for local services and offer property tax credits to incentivize homeowners to give. In turn, those taxpayers would then write off the payment as a charitable deduction on their federal income tax return.

The final IRS/Treasury rule barred the scheme saying that receipt of a state or local tax credit in return for making such a contribution would constitute a “quid pro quo.”

Describing it as “nothing more than a gut punch to the middle-class New Jersey families who know that the Trump tax plan is a complete sham,” New Jersey’s Democrat Governor Phil Murphy announced a lawsuit challenging the regulation.

New York and Connecticut have joined the suit filed in the Southern District of New York.

It sounds like a case of Scheme vs. Sham.

So much for the rich paying less taxes.

CNBC reports that Morgan Stanley’s wealth management business was hit by an unexpectedly high outflow of deposits in the second quarter. Speaking to analysts during a recent earnings call, CFO Jonathan Pruzan said his firm had “greater-than-expected deposit outflows due in part to tax payments. We saw about $10 billion of outflows in the bank deposit program, some from larger tax payments.”

The likely culprit: Under the Trump administration’s 2017 tax reform, the deduction for state income, sales and property taxes was capped at $10,000. That has widely been perceived as causing higher taxes for people living in high tax states such as New York, New Jersey, Connecticut and California.

An Audited Legacy of Quality

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We thought we were building a leading, international accounting firm by providing Big 4 expertise, delivered with personal service.

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