Accounting and the SEC Quarterly Update

Several themes were prevalent across industries and regulatory bodies in Weaver’s September 22, 2022 Accounting and SEC Update. The focus was on improving data quality and comparability, communication, transparency, responses to inflation, cybersecurity threats, and ESG (Environmental, Social, and Governance).

Regulatory Releases

Climate Related ESG – To address organizations that are attaching themselves to ESG initiatives with low levels of evidence (sometimes referred to as greenwashing), proposals have been adopted to enhance disclosures and provide greater transparency for investors.

• Additional disclosures will require presenting ESG Strategies within fund prospectuses, reports, and advisor brochures to allow users to better understand the investments strategy and philosophy, with the goal of reducing “green washing”
• A layered tabular approach for ESG funds will provide a quick snapshot of what the ESG content is within the investments
• Disclosure of greenhouse gas emissions will be a continued area of focus

Whistleblower Program – SEC whistleblower program amendments have been approved. They focus on compensating whistleblowers when alternative compensation may be received from another program and provide greater discretion to increasing award amounts.

Pay versus Performance – Effective fiscal year 2022 for calendar filers, the SEC requires additional disclosures be included in within proxies and 10k’s, and will be in effect for all calendar year end filers for the upcoming Form 10K’s and/or proxy statements. More relaxed measures are required of smaller reporting companies upon adoption. Plan time to get the information together and determine if controls need to be updated or put in place.

China Agreement – The PCAOB (Public Company Accounting Oversight Board) has signed an Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China. The agreement is a big step toward opening access to work papers for inspection and investigation.

10 Areas of Focus 2022 PCAOB Inspections – The PCAOB issued staff overview guidance for planned 2022 inspections. These are likely areas your auditors will continue to be focused on.

CECL Effective Date – A reminder of the 1/1/23 effective date for CECL (current expected credit loss) for Smaller Reporting Companies. Be prepared for not only the disclosure statements, but also to adjust your internal controls related to the application of the standard, including the related estimates and inputs.

Form PF – SEC registered Investment advisors have several proposed amendments to Form PF. Trends include disclosing areas that could generate systemic risk, improve data quality and comparability, and reduce reporting errors.

EDGAR Filer Manual – The amended manual became effective September 19^th.

Emerging Growth Companies (EGC) Amount. In response to inflation and other factors, the revenue threshold for maintaining EGC status has been increased from $1.07b to $1.235b.

Cybersecurity and Privacy

Cybersecurity Incident Reporting was discussed in detail in the Weaver’s Q2 update. The comment period has closed, but a disclosure requirement is expected. In order to leverage components of these programs to meet current and future requirements, it is important to consider the correlation between cybersecurity and privacy.

SEC Disclosure Requirements have generated a lot of interest with concerns particularly around the timing of the communications.

• Rapid disclosure within four days of it being deemed material
  • This could have a material impact on an organizations ability to react to a cyber security event and could create a vulnerability by disclosing the event prior to resolving the risk.
• Updating previously reported cybersecurity incidents
• Disclosing minor risks in the aggregate
• Sharing information on policies, procedures, and governance
• Reporting the expertise on the board and management

Obligations – Organizations need to evaluate their contractual obligations as well as federal and state rules when it comes to cybersecurity and privacy laws

50+ Privacy Laws in progress – Many different agencies at the federal level issue privacy laws relating to consumer, health, financial, and children’s and educational privacy.

 

Five states with signed privacy laws – At the state level, there are a small number of states with existing privacy laws, an additional 4 with legislation in progress, and many others that previously had bills introduced that could be revised or re-introduced.

Control considerations around cybersecurity framework and privacy framework should include an effort toward data minimization and data retention to reduce the organization’s overall exposure.

Management of incident response in compliance with the proposed cybersecurity disclosure requirements and other regulations (including privacy) are improved by:

• Create alignment on the definition of an incident
  • What are the attributes: Who is involved? What was the exposure (the nature and scope of the incident)? Was it contained or prevented? Define whether the incident was material.
• Prepare an incident response and communication framework
  • What needs to be shared from a contractual or regulatory perspective?
  • What is the timing needed for those communications? Consider both the SEC and regulatory bodies.
  • Who are we sharing the information with? How are we sharing it? And what is the depth of the information being shared?
  • Document the responsible parties to ensure no assumptions are made of who is reporting information and what order it’s being done in.
• Create and maintain a process for updating incident tracking and monitoring regulatory and reporting requirements.
• Define what is “enough” detail for individual, smaller incidents to meet potential requirement for reporting aggregation of incidents; however, more clarification from the SEC is required.
• Further maturing of the tracking and reporting of cybersecurity and privacy risks.

Tax Implications of the Inflation Reduction Act and CHIPS Act (Creating Helpful Incentives to Produce Semiconductors)

Corporate Alternative Minimum Tax (AMT) – Despite being aimed at companies reporting record earnings and paying no federal tax, many other companies will be swept into its coverage beyond those that meet the billion-dollar threshold.

• Effective starting next year on “book income” (adjusted financial statement income – AFSI).
• It can be carried forward and used as a credit to offset future “regular tax”
• Applicable to corporations with an annual AFSI greater than $1b (trailing 3-year average, defined in IRC Section 56A and 451(b)(3)) UNLESS subsidiaries of publicly traded foreign companies where the threshold is $100m.
  • There will be a number of adjustments from GAAP net income to AFSI, but regulations need to be received from Treasury to provide guidance on the details.
  • Primarily includes U.S. corporations and CFCs (controlled foreign corporations)
    • Multi-national groups need to focus on their U.S. activity in terms of AFSI
    • AFSI will generally include income/loss from U.S. Corporations, CFCs, ECI, and certain partnership income
• Complexities exist with single employer aggregations
• For ASC 740 Reporting, it will be important to monitor any current tax expense exposure and assess any valuation allowance issues that may be associated therewith.

1% Excise Tax on Stock Repurchases – This stock buy-back provision applies to stock repurchases in publicly traded U.S. corporations or majority owned U.S. subsidiaries. In limited circumstances, it can apply to publicly traded foreign corporations. Effective after 12/31/22, it should be considered as a transactional tax. More guidance is expected.

CHIPS and Science Act – The August Executive Order created the huge 25% tax credit that incentivizes manufacturing semiconductors and related production equipment. These organizations will be attractive investments with some tool and die producers in the oil and gas space expected to shift their production toward semiconductor tools to take advantage of the Act’s tax credits.

State Law Changes – In an effort to create more business-friendly environments, Arkansas and Pennsylvania have approved legislative updates that will require a discrete event to revalue deferred items during the closing of Q3 2022.

• Arkansas accelerated their corporate income tax rate reduction from 5.9% to 5.3% for tax years beginning 1/1/23 so deferred Arkansas tax items reversing in 2023 will need to be examined and adjusted.
• Likewise, Pennsylvania envisions cutting their 9.99% corporate income tax in half and has approved a reduction to 8.99% beginning 1/1/23 with .5% reductions until the rate reaches 4.99% in 2031. Their unique net operating loss (NOL) rule with its long reversal schedule, will present an additional challenge to modeling their deferrals. Pennsylvania also codified its economic nexus rules and market-based sourcing.

Weaver’s Executive Resource Center’s published its “Five Topics for Your Next Board Meeting” is published quarterly to and help you guide conversations around meaningful topics that inform the board and allow executive leadership to share their knowledge and insights.

©2022

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Weaver’s Accounting and SEC Update

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