Fall Industry Update: FASB, SEC, CFTC, PCAOB, Cryptocurrency Update, Federal Tax Update, SALT Update

Clients, Friends, and Associates:

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

FASB:
  • Issues ASU No. 2017-12 Derivatives and Hedging
    • The amendments better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.
    • Amendments expand and refine hedge accounting for both nonfinancial and financial risk components, and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements.
    • Concern areas addressed include:
      – Risk Component Hedging
      – Accounting for the Hedged Item in Fair Value
      Hedges of Interest Rate Risk
      – Recognition and Presentation of the Effects of
      Hedging Instruments
      – Amounts Excluded from the Assessment of Hedge
      Effectiveness
    • Click here to read the full update.
SEC:
  • Publishes Report on Access to Capital and Market Liquidity
    • The Report describes trends in primary securities issuance and secondary market liquidity, and assesses how those trends related to post-crisis regulatory reforms.
    • The report examines the issuance of debt, equity, and asset-backed securities, as well as activity and liquidity in U.S. Treasuries, corporate bonds, single-name credit default swaps, and bond funds.
    • Specifically, the report identifies trends for unregistered offerings, such as those under Regulation D and Regulation Crowdfunding, as well as fixed income transactions, fixed income quotations, and broker-dealer financial positions.
    • Click here to read the press release.
  • Updates Issued to Interpretive Guidance on Revenue Recognition
    • Consistent with developments in private-sector accounting standard setting, the SEC issued a release to update its guidance for bill-and-hold arrangements by stating that registrants should no longer refer to the criteria in Accounting and Auditing Enforcement Release No. 108, In the Matter of Stewart Parness (AAER 108), to recognize revenue for such arrangements upon the registrants’ adoption of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers.
    • In addition, the SEC issued a release to update its 2005 Commission Guidance Regarding Accounting for Sales of Vaccines and Bioterror Countermeasures to the Federal Government for Placement into the Pediatric Vaccine Stockpile or the Strategic National Stockpile.
    • Click here to read the press release.
  • Provides Regulatory Relief and Assistance for Hurricane Victims
    • SEC is providing regulatory relief to publicly traded companies, investment companies, accountants, transfer agents, municipal advisors, and others affected by Hurricane Harvey, Hurricane Irma, and Hurricane Maria.
    • Issued an order that conditionally exempts affected persons from certain requirements of the federal securities laws for periods following the weather events.
    • Click here to read the press release.
  • Adopts Interpretive Guidance on Pay Ratio Rule
    • States the Commission’s views on the use of reasonable estimates, assumptions and methodologies, and statistical sampling permitted by the rule.
    • Clarifies that a company may use appropriate existing internal records, such as tax or payroll records, in determinations about the inclusion of non-U.S. employees and in identifying the median employee.
    • Provides guidance as to when a company may use widely recognized tests to determine whether its workers are employees for purposes of the rule.
    • Click here to read the press release.
CFTC:
  • Provides Relief for Reporting Parties from Reporting Obligations
    • Extends current relief and provides additional relief to reporting parties from reporting obligations as required by the ownership and control reports (OCR) final rule (OCR Final Rule).
    • The OCR Final Rule, approved in 2013, established requirements related to new ownership and control rules and related forms to enhance its identification of futures and swap market participants.
    • Click here to read the press release.
  • Releases a Primer on Virtual Currencies
    • Considers tokens issued through initial coin offerings (ICOs) as commodities.
    • Points out that “there is no inconsistency between the SEC’s analysis [that blockchain-based tokens sold through the funding model could fall under the federal definition of a security] and the CFTC’s determination that virtual currencies are commodities and that virtual tokens may be commodities or derivative contracts depending on particular facts and circumstances.
    • Click here to read the primer.
PCAOB:
  • Publishes Annual Report on 2016 Inspections of Broker-Dealer Auditors
Cryptocurrency Update:
  • Cryptocurrency Tax Fairness Act of 2017 introduced to provide tax relief for small purchases made using cryptocurrency
    • U.S. House Representatives Jared Polis (D-CO) and David Schweikert (R-AZ) introduced a bipartisan bill that would provide tax relief for small purchases made using cryptocurrency. As co-chairs of the Congressional Blockchain Caucus, Mr. Polis and Mr. Schweikert introduced the Cryptocurrency Tax Fairness Act of 2017 (the “Act”), which proposes that gross income would not include gain from the sale or exchange of cryptocurrency for property other than cash or cash equivalents if the gain does not exceed $600.
Federal Tax Update:
  • In an effort to reduce perceived burdens created by excessive tax regulations, President Trump issued Executive Order 13789 (the “Order”) that instructed the U.S. Treasury (the “Treasury”) to review “significant tax regulations” issued on or after January 1, 2016. On October 2, 2017, the Treasury identified eight regulations that met the criteria as overly burdensome and provided a report outlining specific actions to mitigate such burdens.
    • a. Below is brief summary of the regulations that may be relevant to our clients and the Treasury’s proposed actions. For a complete list of the overly burdensome regulations, see the Treasury Report here.
      • i. Revise or revoke in part and maintain in part the proposed and temporary regulations under IRC section 707 and 752 on the treatment of partnership liabilities.
        • 1. The proposed and temporary regulations governing how liabilities are allocated for purposes of the disguised sale treatment are a substantial change, and that would have affected both recourse and non-recourse liability allocation during the formation of a partnership.
      • ii. Defer implementation and possibly modify in the future the final regulations under IRC section 987 relating to income and currency gain or loss with respect to a qualified business unit.
        • 1. The final regulations (i) translating income from branch operations conducted in a currency different from the branch owner’s functional currency into the owner’s functional currency; (ii) calculating foreign currency gain or loss with respect to the branch’s financial assets and liabilities; and (iii) recognizing such foreign currency gain or loss when the branch makes certain transfer of any property to its owner are expected to be deferred until 2019.
      • iii. Revise or revoke in part and maintain in part final and temporary regulations under IRC section 385 pertaining to the classification of related-party debt as debt or equity for federal income tax purposes.
        • 1. The section of the regulations establishing minimum documentation requirements that ordinarily must be satisfied in order for purported debt obligations among related parties to be treated as debt for federal income tax purposes were delayed until 2019. However, the Treasury is considering whether to revoke this section as issued or revise this section to simplify and streamline.
      • iv. Withdraw entirely the proposed regulations under IRC section 2704 limiting valuation discounts for transfers of interests in family-controlled entities.
        • 1. On October 17, 2017, the IRS formally withdrew the controversial proposed regulations that limited valuation discounts used by family-controlled entities for estate, gift, and generation-skipping transfer tax purposes.
  • On October 20, 2017, the Treasury released the 2017-2018 Priority Guidance Plan that sets forth guidance on regulations that the Treasury hopes to complete during the tax year.
    • a. The 28 page guidance provides a wide range of wish list items including additional guidance on the new partnership audit regulations, guidance on the mark-to-market election under IRC section 475 and guidance on withholding certificates for payments to foreign person. Noticeably absent from the list is any reference to virtual currency, although this is not indicative that the Treasury is not thinking about virtual currency regulation. A complete view of the 2017 Priority Guidance list can be found here.
SALT Tax Update:
  • Updates New Jersey estate tax for exemption amount increase and repeal
    • The state estate tax exemption amount is increased from $675,000 to $2,000,000 for individuals passing on or after January 1, 2017 but before January 1, 2018. For individuals passing on or after January 1, 2018, the state estate tax is repealed.

We welcome your suggestions for future topics that you would like to see included in this Industry Update. Also, for further information regarding these changes, please contact your Cohen & Company representative at 855-787-0001 or via email at dist-hvy-contactus@cohencpa.com.

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