SEC adopts Regulation Crowdfunding

Contents FASB posts October 28 meeting highlights
     Financial statements of not-for-profit entities    
     Accounting for identifiable intangible assets in a business combination
     Subsequent measurement of goodwill
     Targeted improvements for long-duration life insurance contracts
EITF releases agenda for November 12 meeting
     SEC adopts Regulation Crowdfunding
     Amendments to certain Securities Act rules proposed to further facilitate capital formation
     ASB issues new standard on integrated audits
     Guidance released on reporting on sustainability financial statements
     FinREC issues revenue recognition implementation issue working drafts
     Audit and Accounting Guides published
     Audit Risk Alerts published

FASB posts October 28 meeting highlights All decisions reached at Board meetings are tentative and may be changed at future meetings. Decisions are included in an Exposure Draft only after a formal written ballot. Decisions reflected in Exposure Drafts are often changed in redeliberations by the Board based on information received in comment letters, at public roundtable discussions, and from other sources. Board decisions become final after a formal written ballot to issue a final Accounting Standards Update.

At its meeting on October 28, the FASB discussed the financial statements of not-for-profit entities, the accounting for identifiable intangible assets in a business combination, the subsequent measurement of goodwill, and targeted improvements for long-duration life insurance contracts.

Highlights of the Board’s discussion follows.

Financial statements of not-for-profit entities The Board discussed feedback received on the proposed ASU, Presentation of Financial Statements of Not-for-Profit Entities, and tentatively decided to divide its redeliberations into two work streams.

Under the first work stream, the Board would reconsider the following issues, which are improvements that the Board might finalize in the near term that do not depend on other projects:

  • Net asset classification scheme, including disclosure of board-designated funds, underwater endowments, and the placed-in-service option for expirations of capital restrictions
  • Expenses, including expenses by nature and an analysis of expenses by function and nature; netting of external and direct internal investment expenses against investment return; disclosure of netted investment expenses; and enhanced disclosures about cost allocations
  • Improvement of disclosures by not-for-profit entities that choose to present operating measures
  • Improvement of disclosures of information useful in assessing liquidity
  • Methods of presenting operating cash flows

The second work stream would include proposed changes that are likely to require more time to resolve because they either involve consideration of alternatives that the Board did not previously consider or are related to similar issues being addressed in other projects. These changes include

  • An assessment of operating measures, including whether to require intermediate measures, how to define the measures and what would be included in the measures, and stakeholder-suggested alternative disaggregation approaches
  • Realignment of certain line items in the statement of cash flows

Accounting for identifiable intangible assets in a business combination The Board tentatively decided to continue the project on whether to change the initial recognition of customer-relationship intangible assets or noncompetition agreements acquired in a business combination for public business entities. The Board asked the staff to conduct research on whether the usefulness of information provided by the recognition of acquired intangible assets is different for U.S. and international investors and, if applicable, to determine why any differences exist.

The Board deferred any decisions about whether not-for-profit entities could use the accounting alternative currently available to private companies or if they would be required to use the guidance for public business entities until decisions are made regarding whether to change the accounting for identifiable intangible assets for public business entities.

Subsequent measurement of goodwill The Board tentatively decided to continue with the project on subsequent measurement of goodwill under a phased approach, as follows:

  • First phase: Simplify the impairment test by removing the requirement to perform a hypothetical purchase price allocation when the carrying value of a reporting unit exceeds its fair value (step 2 of the impairment model in current U.S. GAAP). The Board considered, but tentatively decided against, allowing entities an option to perform step 2.
  • Second phase: Work with the IASB to address any additional concerns about the subsequent accounting for goodwill.

Additionally, the Board reached the following tentative decisions:

  • Not-for-profit entities would not be allowed to use the accounting alternative that is currently available to private companies.
  • Presentation requirements in current GAAP would not be changed.
  • Entities would be required to adopt the simplified impairment test prospectively.
  • If a reporting unit has zero or negative carrying value and it is more likely than not that goodwill is impaired, an entity would be required to write off the full carrying amount of goodwill allocated to that reporting unit.

The Board asked the staff to conduct research on the qualitative assessment for entities with reporting units with a zero or negative carrying value.

Targeted improvements for long-duration life insurance contracts The Board tentatively decided that the liability for future policy benefits for participating life insurance contracts would be calculated on the basis of expected future cash flows, including dividends. Future cash flows would be discounted using a high-quality, fixed-income instrument yield.

The Board also tentatively decided that entities would be required to update cash flow assumptions using a retrospective approach and discount rate assumptions using an immediate approach. These changes are consistent with the Board’s previous decision for traditional long-duration and limited-payment insurance contracts.

Under these assumption method updates, the net premium ratio would be recalculated as of the contract inception date using actual historical experience and updated future cash flow assumptions. The revised net premium ratio would be applied to derive a cumulative catch-up adjustment recorded in current-period earnings. In subsequent periods, the revised net premium ratio would be used to accrue the liability for future policy benefits. The net premium ratio would be capped at 100 percent. No updates to the net premium ratio for discount rate changes would be made; rather, the effect of changes in the discount rate assumption would be recorded immediately in other comprehensive income.

EITF releases agenda for November 12 meeting The EITF recently released its proposed agenda for its November 12 meeting, which includes the following topics:

  • Issue 15-B, “Recognition of Breakage for Certain Prepaid Stored-Value Cards”
  • Issue 15-F, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments”
  • Issue 15-D, “Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships”
  • Issue 15-E, “Contingent Put and Call Options in Debt Instruments”

JOBS Act The Jumpstart Our Business Startups Act (JOBS Act) is intended to foster job creation and economic growth by assisting smaller companies in accessing the capital markets. Primary beneficiaries of the JOBS Act are issuers known as “emerging growth companies.”

SEC adopts Regulation Crowdfunding On October 30, the SEC adopted the Final Rule, Crowdfunding, mandated by Title III of the JOBS Act, to allow smaller companies to raise a maximum of $1 million through crowdfunding offerings in a 12-month period and to exempt those companies from registration requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934 (Exchange Act). The Final Rule also limits investments made by individuals in crowdfunding offerings.

Companies that conduct a crowdfunding offering are required to file and disclose certain information to the SEC and their regulated intermediary (either a broker-dealer or a funding portal). That information includes, among other things, financial statements either reviewed by an independent accountant or audited by an independent auditor, depending on the amount offered. Reviewed financial statements will be permitted for first-time filers under the Final Rule, unless audited financial statements are available.

The exemptions under the Final Rule are not available to certain companies, including non-U.S. companies, companies already subject to Exchange Act reporting, certain investment companies, companies that are considered disqualified under Regulation Crowdfunding or that have not complied with the annual reporting requirements during the most recent two years, or companies with no business plan or current operations.

The Final Rule will become effective 180 days after publication in the Federal Register.

With the adoption of this Final Rule, the Commission has completed all major rulemaking mandated by the JOBS Act.

Amendments to certain Securities Act rules proposed to further facilitate capital formation On the same day, the SEC proposed certain amendments to Securities Act Rule 147 and Rule 504 of Regulation D to further facilitate intrastate and regional securities offerings.

Under the proposal, companies would be permitted to raise up to $5 million in any 12-month period from investors within their state and continue to be exempt from registering at the federal level. The proposed amendments would also increase the amount of securities allowed to be offered or sold under Rule 504 from $1 million to $5 million in any 12-month period.

The comment period ends 60 days after publication in the Federal Register.

AICPA ASB issues new standard on integrated audits The AICPA Auditing Standards Board (ASB) issued Statement on Auditing Standards (SAS) 130, An Audit of Internal Control Over Financial Reporting That Is Integrated With an Audit of Financial Statements, to establish requirements and provide guidance when an auditor is engaged to perform an audit of internal control over financial reporting (ICFR) that is integrated with an audit of financial statements under AICPA standards. The standard does not impact ICFR audits performed under PCAOB standards.

SAS 130 was issued as part of the ASB’s project to clarify the attestation standards. The new standard places the requirements and guidance for performing an ICFR audit within the audit standards to improve the interaction with the standards for audits of financial statements.

SAS 130 also includes the following changes from the previous requirements in the attestation standards:

  • The auditor is required to examine and report directly on the effectiveness of ICFR. There is no longer an option to examine and report on management’s assertion about the effectiveness of ICFR.
  • The term “significant account or disclosure” used in AT Section 501, An Examination of an Entity’s Internal Control Over Financial Reporting That is Integrated With an Audit of Its Financial Statements, has been changed to “significant class of transactions, account balance, or disclosure” to align with terminology used in existing U.S. generally accepted auditing standards (GAAS).
  • The auditor is allowed to use the work of internal auditors and others in obtaining evidence about the effectiveness of ICFR. SAS 130 requires the auditor planning to use the work of others in an ICFR audit to adapt and apply, as necessary, the requirements of AU-C Section 610, Using the Work of Internal Auditors, including the need for others to apply a systematic and disciplined approach.

Statement on Standards for Attestation Engagements 15, An Examination of an Entity’s Internal Control Over Financial Reporting That Is Integrated With an Audit of Its Financial Statements, will be withdrawn, along with a related attestation interpretation, “Reporting Under Section 112 of the Federal Deposit Insurance Corporation Improvement Act,” when SAS 130 becomes effective. Amendments to various sections of SAS 122, Statements on Auditing Standards: Clarification and Recodification, will also take effect when SAS 130 becomes effective.

SAS 130 is effective for integrated audits for periods ending on or after December 15, 2016.

Guidance released on reporting on sustainability financial statements The ASB issued Interpretation 2, “Sustainability Financial Statements Under Federal Financial Accounting Standards – Auditor Reporting,” of AU-C Section 9700, Forming an Opinion and Reporting on Financial Statements: Auditing Interpretations of AU-C Section 700, to provide guidance on reporting on sustainability financial statements.

Consistent with U.S. GAAS, Interpretation 2 permits an auditor to report on U.S. government component financial statements containing sustainability financial statements. The interpretation also includes an illustrative independent auditor’s report.

FinREC issues revenue recognition implementation issue working drafts The AICPA Financial Reporting Executive Committee (FinREC) issued working drafts of nine revenue recognition implementation issues for informal comment. The working drafts, which discuss considerations and provide illustrative examples of industry-specific transactions for entities implementing ASU 2014-09, Revenue from Contracts with Customers, are as follows:

  • Asset Management Issue 10-1: Who Is the Customer? – Provides considerations for determining whether the investor or the fund is the customer in a contract with an asset manager.
  • Asset Management Issue 10-7: Deferred Distribution Commission Expenses (“back-end load funds”) – Provides considerations for how an asset manager would account for commissions paid to a mutual fund distributor for back-end load funds.
  • Aerospace & Defense Issue 1-1: Acceptable Measures of Progress – Discusses items to consider when determining the appropriate method to use when measuring progress toward completion of performance obligations satisfied over time.
  • Aerospace & Defense Issue 1-2: Accounting for Contract Costs – Proposes considerations for applying the guidance for incremental costs of obtaining a contract, precontract costs, costs to fulfill a contract, learning or start-up costs, and amortization and impairment of costs typically incurred in aerospace and defense contracts.
  • Aerospace & Defense Issue 1-3: Variable Consideration and Constraining Estimates of Variable Consideration – Discusses considerations for determining estimates of variable consideration, the constraints on variable consideration, and the impact of subsequent modifications on the estimated variable consideration to include in the transaction price.
  • Aerospace & Defense Issue 1-4: Contract Existence and Related Issues for Foreign Contracts With Regulatory Contingencies and Unfunded Portions of U.S. Government Contracts – Discusses impact of regulatory approval on the determination of whether certain executed/signed aerospace and defense contracts meet the criteria for existence of a contract, and proposes considerations for applying the guidance for variable consideration to unfunded portions of U.S. government contracts.
  • Aerospace & Defense Issue 1-5: Transfer of Control on Non-US Federal Government Contracts – Provides considerations to determine if non-U.S. government aerospace and defense contracts should be performance obligations satisfied over time or at a point in time.
  • Aerospace & Defense Issue 1-12: Significant Financing Component – Proposes considerations to assess whether a significant financing component exists in determining the transaction price for various types of aerospace and defense contracts.
  • Aerospace & Defense Issue 1-16: Allocating the Transaction Price – Discusses considerations to determine how to allocate the transaction price to multiple performance obligations in aerospace and defense contracts.

The issues have been posted on and can be downloaded from the AICPA website. Once finalized, the implementation issues will be included in a Revenue Recognition Guide the AICPA is developing.

Informal comments are due by December 31, 2015.

Audit and Accounting Guides published The AICPA recently issued the following Audit and Accounting Guides to provide guidance on accounting, auditing, and regulatory issues:

  • Broker and Dealers in Securities
  • Health Care Entities

Audit Risk Alerts published The AICPA has issued the following Audit Risk Alerts:

  • General Accounting and Auditing Developments – 2015/16
  • Developments in Preparation, Compilation, and Review Engagements – 2015/16
  • Health Care Industry Developments – 2015/2016

These alerts provide information on recent industry, technical, regulatory, or professional developments, as well as guidance, practice aids, and illustrative examples, for common audit and accounting issues.

© 2015 Grant Thornton LLP, U.S. member firm of Grant Thornton International Ltd. All rights reserved. This Grant Thornton LLP On the Horizon provides information and comments on current accounting and SEC reporting issues and developments. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting or other advice or guidance with respect to the matters addressed in this publication. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this publication. For additional information on topics covered in this publication, contact a Grant Thornton client-service partner.