Monthly Industry Update: FASB, SEC, CFTC, AICPA, and IRS

We are pleased to share this Industry Update on recent changes impacting the alternative investment industry.

FASB:
  • Issues ASU No. 2017-11 Distinguishing Liabilities from Equity
    • The update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments that result in the strike price being reduced on the basis of the pricing of future equity offerings.
    • When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments.
    • Click here to read the full update.
SEC:
  • Concludes DAO Tokens, a Digital Asset, are Securities
    • The investigative report cautions market participants are subject to the requirements of the federal securities laws. Offers and sales, conducted by organizations using distributed ledger or blockchain technology, have been referred to as “Initial Coin Offerings” or “Token Sales.”
    • Those participating in unregistered offerings also may be liable for violations of the securities laws. The purpose of the registration provisions of the federal securities laws is to ensure that investors are sold investments that include all the proper disclosures and are subject to regulatory scrutiny for investors’ protection.
    • Click here to read the press release.
CFTC:
  • Announces Review of Swaps Reporting Regulations
    • The Division will focus on changes to the existing regulations and guidance with two goals at the forefront:
      • To ensure that the CFTC receives accurate, complete, and high quality data on swaps transactions for its regulatory oversight role.
      • To streamline reporting, reduce messages that must be reported, and right-size the number of data elements that are reported to meet the agency’s priority use-cases for swaps data.
    • Click here to read the press release.
  • Extends Relief on Transaction-Level Requirements in Certain Cross-Border Situations
    • Extends relief to swap dealers registered with the CFTC that are established under the laws of jurisdictions other than the U.S. from certain transaction-level requirements under the Commodity Exchange Act.
    • Click here to read the press release.
AICPA:
  • Issues New Auditing Standard for Auditor Responsibilities Regarding Exempt Securities
    • Auditors involved with exempt offering documents will benefit from the clarity provided by a new auditing standard issued by the AICPA. Statement of Auditing Standards No. 133 will guide auditors with respect to their responsibilities related to offerings of securities exempt from registration under the Securities Act of 1933 and franchise offerings.
    • SAS No. 133 will be effective for exempt offering documents with which the auditor is involved that are initially distributed, circulated, or submitted on or after June 15, 2018.
    • Examples of the types of offerings addressed by SAS No. 133 included the following:
      • Municipal securities
      • Securities issued by non-profit religious, education or charitable organizations
      • Crowdfunding
      • Small issues of securities
      • Franchise offerings
    • Click here to read this press release.
IRS:
  • Extends the Deadline for Certain Foreign Financial Institutions (FFI) to Renew Their FFI Agreements from July 31, 2017 to October 24, 2017.
  • Reissues Proposed Regulations that Implement the Centralized Partnership Audit Rules That Take Effect for Tax Years Beginning January 1, 2018.
    • In preparation for these new rules, we recommend our clients take the following actions:
      • Update operating agreements to include language appointing the partnership representative (PR).
        • Currently the agreements should contain language appointing the tax matters partner (TMP), which will no longer be relevant beginning on January 1, 2018.
        • Determine any contractual restrictions or requirements the partnership may choose to impose on the PR, such as a requirement to notify the partners of any notice of proposed partnership adjustment (NOPPA). However, the regulations state such restrictions are not binding on the PR with respect to limiting its power when working with the IRS.
      • Determine the partnership’s policy, if eligible, on “electing out” of the new rules or “pushing out” the partnership liability (i.e. additional tax, penalties, and interest) from the partnership to the partners.
      • If unable to elect out, create policies to request modifications of any NOPPA, including obtaining certain required information from the partners.
      • Click here to read the proposed regulations.
    • Issues Notice 2017-38 Providing That the Following Regulations Have Been Concluded By the Treasury to possibly, (i) Impose an Undue Financial Burden on U.S. taxpayers; (ii) Add Undue Complexity to the Federal Tax Laws; or (iii) Exceed the Statutory Authority of the IRS. The Treasury Must Submit by September 18, 2017 “specific actions to mitigate the burden imposed by the regulations.”
      • Proposed regulations under IRC section 103 on definition of political subdivision.
      • Temporary regulations under IRC section 337(d) on certain transfers of property to regulated investment companies (RIC) and real estate investment trusts (REITS).
      • Final regulations under 7602 on the participation of a person described in IRC section 6103(n) (i.e. outside economists, engineers, consultants, or attorneys) in a summons interview.
      • Proposed regulations under IRC section 2704 on restrictions on liquidation of an interest for estate, gift, and generation skipping transfer taxes.
      • Temporary regulations under IRC section 752 on liabilities recognized as recourse partnership liabilities.
      • Final and temporary regulations under IRC section 385 on the treatment of certain interests in corporations as stock or indebtedness.
      • Final regulations under IRC section 987 on income and currency gain or loss with respect to an IRC section 987 qualified business unit.
      • Final regulations under IRC section 367 on the treatment of certain transfers of property to foreign corporations.
      • Click here to read this notice.
    • Issues Notice 2017-42 Delaying the Effective Date and Phase in of Certain Provisions of the Dividend Equivalent Regulations Under IRC Section 871(m) by One Year. For Example:
      • The regulations extend the effective date for non-delta-one transactions from those issued on or after January 1, 2018 to those issued on or after January 1, 2019.
      • The good faith effort standards to comply with the regulations are extended for any delta-one transaction from 2017 to 2018, and for any non-delta-one transaction from 2018 to 2019.
      • The simplified standard for withholding agents to determine whether transactions entered into in 2017 must be combined for purposes of determining whether the transactions are “section 871(m) transactions” subject to withholding under the regulations is extended to 2018.
      • The Notice extends multiple phase-in dates for qualified derivative dealers (QDD) including the requirement for a QDD to compute its section 871(m) amount using the net delta approach beginning in 2018 is delayed until 2019.
      • Click here to read this notice.
Other:
  • In Grecian Magnesite Mining, v. Commissioner149 TC No. 3, the U.S. Tax court declined to follow IRS Revenue Ruling 91-32, instead holding that a foreign partner’s gain from the sale of a U.S. domestic partnership is treated as a capital asset and therefore, not subject to U.S. federal income tax. The implications of this decision are still unknown and will depend on whether the decision is appealed. Arthur Bell will continue to monitor the progression of this ruling as this could lead to significant planning opportunities for non-U.S. investors.
  • Click here to read more about this case.

We welcome your suggestions for futures topics that you would like to see included in this Industry Update. Also, for further information regarding these changes, please contact your Arthur Bell representative at 855-787-0001 or via email at contactus@arthurbellcpas.com.

Share on FacebookTweet about this on TwitterShare on Google+Share on LinkedIn