Field of Study: Accounting In the era of a global crisis due to COVID-19, many economists expect 2020 to be the year when we will experience the worst recession since the Great Depression. Many industries, such as oil and gas, retail and manufacturing, hospitality, portions of the transportation sector, tourism, manufacturing, aerospace and many others have reported goodwill impairment in the first two quarters of 2020 and more impairments are likely to spike before the end of the year. The negative economic impact of the virus is certainly considered a triggering event and justifies an impairment test on long-lived assets or asset groups for most industries. Todd Rahn, senior managing director and lead of accounting advisory practice on the west coast and Chris Brown, senior managing director, from FTI Consulting, discuss industries that are at the greatest risk for impairment. Field of Study: Accounting COVID-19 imposed certain pressures on C-suite executives and has created an environment that is ripe for fraudulent activity. Pressure is one of the three legs in the fraud triangle model that can lead someone to commit fraud, along with perceived opportunity and rationalization. It’s easy to talk in general terms about pressure, opportunity and rationalization, but how does each one surface in day-to-day operations, especially during the pandemic? Todd Rahn, senior managing director and lead of accounting advisory practice on the west coast and Chris Brown, senior managing director, from FTI Consulting, continue our segment discussing related pressures, incentives and opportunities to commit financial reporting fraud that should be considered in an entity's risk assessment from a corporate perspective. Field of Study: Taxes On August 8, 2020, the White House issued a “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster” allowing deferral of the withholding, deposit, and payment of the tax on wages or compensation paid during the period of September 1, 2020 through December 31, 2020. Barbara Weltman, president of Big Ideas for Small Business is giving us some of the highlights of the presidential deferral pronouncement, as well as the IRS developments on payroll-related matters. Field of Study: Accounting Environmental, social and governance (ESG) criteria may not be a new set of standards but it is gaining more and more ground amongst private equity companies and investors as it helps screen potential investments. Modern investors reevaluate and challenge traditional investment approaches as the global environment evolves and becomes more complex. ESG criteria assess a company’s values and behaviors and help investors see if these values match their own. Anthony DeCandido, financial services partner and senior financial services analyst for RSM US LLP, discusses the ESG criteria in further detail and its objectives.

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1. COVID-19: Are

Your Financial

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Infected? –

Part I

2. COVID-19: Are

Your Financial

Statements

Infected? –

Part II

3. Deferral of

Payroll Tax

Obligations and

More

4. Data Validation

& Reporting

Excellence –

The Future of

Corporate

Responsibility

CPA REPORT SUBSCRIBER GUIDE

OCTOBER 2020

Summary Page i [p. 1]

CPE Requirements iii [pp. 3–5]

Segment One 1–1 [pp. 7–38]

Segment Two 2–1 [pp. 39–69]

Segment Three 3–1 [pp. 71–100]

Segment Four 4–1 [pp. 101–132]

Evaluation Form A–1 [pp. 133–134]

Index B–1 [pp. 135–139]

Group Live Attendance Form C–1 [p.141]

68]

CPA Report is a product of www.kaplanfinancial.com

Information regarding COVID-19 changes rapidly; further updates will be in upcoming segments.

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e CPE Requirements and Group Live

1. Select discussion leaders who have the appropriate education and/or experience both to teach the segment subject and conduct the subsequent group discussion.

2. Have each discussion leader review the video segment and the written materials in the Subscriber Guide prior to the presentation of the segment.

3. Make sure that each discussion leader certifies the attendance at his/her discussion group by signing and dating the Group Live Attendance Form.

4. (Individuals) View the video segment (30 to 35 minutes).

5. (Individuals) Discuss the segment materials as they relate to his/her own work and/or organization (20 to 25 minutes).

6. (Individuals) Evaluate the instructor using the criteria listed on the Evaluation Form.

7. Check with your State Board of Accountancy for specific details, including group live sponsorship registration requirements.

Group Live Format

When taking a CPA Report segment on a group live basis, individuals earn CPE credits when they (or their organization) do the following:

CPE RequirementsWhen properly administered, the CPA Report educational program meets the requirements for group live and self-study participation as defined in the Statement for Standards in CPE Reporting.

Please note: l You cannot earn additional credits by taking the same course in group live format

and online self-study format.

l CPE requirements vary from state to state. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. CPAs should contact their state board regarding specific CPE requirements.

iv

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e The following information will help you plan and implement the CPA Report program within your firm:

How to Implement the CPA Report

1. Each quarter, you may receive by email a CPA Report Summary Page in advance of the video segment notifying you of the upcoming Continuing Professional Education topics that will be covered.

2. The CPAR DVD is expected to arrive the month following the end of the quarter. If you do not have a standard day and time each quarter designated as CPE day, issue a memo with the date of your upcoming seminar. (If attendance is not required, please provide plenty of advance notice for optimum participation).

3. Select the topic(s) you wish to cover in your session when the CPAR Summary Page or the actual program arrives.

4. It is best for an organization to have its CPE classes on a regular and consistent basis, so it is easy for the staff to remember when scheduling clients.

5. You may wish to provide each group live attendee a “Certificate of Completion” noting the hours earned and the topic areas.

6. Always check with your State Board of Accountancy for specific details, including group live sponsorship registration requirements.

If you need more information or have any questions, please contact Customer Service at CPESupport@kaplan.com or 914-517-1177.

Note: CPE requirements vary from state to state. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. CPAs should contact their state board regarding specific CPE requirements.

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CPA Report Update

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Please note: This issue of CPA Report Online Self-Study is scheduled to go live online on October 30, 2020.

If you need more information or have any questions, please contact Customer Service at CPESupport@kaplan.com or 914-517-1177.

Online Self-Study

Kaplan Financial Education is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.nasbaregistry.org.

Self-Study Format

Participants can gain self-study credit by enrolling in the CPA Report Online Self-Study library of courses. All components of the program will be hosted online, including the video, interactive review questions, required reading, and final exam.

In order to ensure adherence to NASBA guidelines regarding self-study, the CPA Report and CPA Report Government/Not-for-Profit Self-Study Professional Education Centers are no longer available. Customers should contact their company administrators for information on taking course exams and receiving CPE credit for the courses.

Customers may contact Kaplan Financial Education at cpesupport@kaplan.com to obtain certificates previously earned through the CPA Report Self-Study and CPA Report Government/Not-for-Profit Self-Study Professional Education Centers.

Customers interested in the self-study format of the CPA Report can find information on Kaplan Financial Education's self-study libraries at Online Accounting CPE Courses.

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one 1. COVID-19: Are Your Financial Statements

Infected? – Part I

Learning Objectives:

Segment Overview:

Field of Study:

Recommended Accreditation:

Reading (Optional for Group Study):

Running Time:

Video Transcript:

Course Level:

Course Prerequisites: Advance Preparation:

Expiration Date:

Accounting

December 12, 2021

Work experience in financial reporting or accounting, or an introductory course in accounting.

None

1 hour group live 2 hours self-study online

Update

“COVID-19 Impacts on Accounting, Disclosures & Internal Controls” FTI Consulting

See page 1–13.

See page 1–20.

34 minutes

In the era of a global crisis due to COVID-19, many economists expect 2020 to be the year when we will experience the worst recession since the Great Depression. Many industries, such as oil and gas, retail and manufacturing, hospitality, portions of the transportation sector, tourism, manufacturing, aerospace and many others have reported goodwill impairment in the first two quarters of 2020 and more impairments are likely to spike before the end of the year. The negative economic impact of the virus is certainly considered a triggering event and justifies an impairment test on long-lived assets or asset groups for most industries. Todd Rahn, senior managing director and lead of accounting advisory practice on the west coast and Chris Brown, senior managing director, from FTI Consulting, discuss industries that are at the greatest risk for impairment.

Upon successful completion of this segment, you should be able to: l Identify the treatment of lease accounting under Topic 842, l Determine what companies should focus on to determine if

impairment is needed, l Identify indicators that companies should be mindful of, and l Recognize reporting units during restructuring.

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I. Impairments in the Area of COVID

A. Impact of Real Estate on Other Industries

i. Lack of investments in new office space l Wide swath of impact in the

construction industry

ii. Unmet lease obligations or lack of rental income l Allow banks to make massive

loan loss provisions under CECL

B. Loan Modifications Treatment Under the Current Rules

i. Take an immediate loss for the entire expected life of the lease

C. Topic 842 – Leases

i. The new standard makes it easier to l Consider lease modifications l Extensions and changes in terms

II. Real Estate and Credit Loss Modifications

A. Types of Triggering Events

i. Negative cash flows from operations

ii. Loss of key customers

iii. Unanticipated competition

iv. Economic downturn

B. ASU 2017-02 Simplification Rules

i. Allows goodwill to be amortized

ii. Simplifies impairment testing

C. Treatment After a Test of Recoverability

i. If carrying amount of asset or asset group exceeds undiscounted future cash flows: l Measure the impairment l Impairment loss needs to be

recognized

D. Impairment in Technology & Life Science

i. May not be benefiting l Due to increased number of

intangible assets

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A. Litigations – Great Recession Versus COVID-19

i. Great Depression l Financial services industry was

mostly impacted l SEC increased scrutiny of

reporting unit determinations & timing of impairments

l Increased SEC comment letter inquiring into goodwill impairment matters & enforcement actions

ii. COVID-19 l The industry range is much

broader l SEC focused on timing,

disclosures and indicators of early warning signs

l Increase in SEC comment letters inquiries into goodwill impairment matters & enforcement actions are expected

B. Fall of 2019

i. Economic growth

ii. Stock market was up

iii. M&A market was very high

C. The Current Environment

i. Certain industries and sectors are gone overnight

ii. Drives exposure to potential impairment charges l Restructuring l Going concern

iii. SEC expectation for companies to be transparent

III.Litigation Trends

A. FASB – Two-Step Test

i. Determine if there is a decline in fair value

ii. Allocate that fair value against the balance sheet

B. What Companies Should Focus On

i. Have a clear understanding of what reporting units are within their business

ii. Identify indicators that may lead to impairment

iii. Look at impairment of other assets, not only goodwill

C. FASB & SEC Focus

i. Trying to prevent companies hiding an impairment problem of a particular portion of the business l Through the profitability of

another portion of the business

D. Treatment Under the Current Standard

i. Once there is a decline in value below the book value l Book that against goodwill until

the goodwill has disappeared

E. Indicators to be Mindful of

i. Sales are down l Drop in the number of

customers

ii. Website traffic

iii. Employment movements l Drop in gross profit l Drop in revenue

F. You Have Indicators – Now What?

i. Indicators will present certain situations

ii. Drive conversations

iii. More likely than not will lead to impairment

IV. Assessing Goodwill Impairment

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V. Considerations for Reporting Units A. Identifying the Right Reporting Units

i. Portion of the business owned by somebody within the organization

ii. Are there financial results of the reporting unit they are responsible for?

iii. Economic characteristics

iv. Use trend analysis and results over time to ensure l Fairness l Objectivity l Use of appropriate judgment

B. Reporting Units & Restructuring

i. Reallocate goodwill

ii. Document basis and determination of the approach

iii. Ensure you are not hiding goodwill impairment l Or taking a higher goodwill

impairment than needed

iv. Be consistent

VI. Forecasts in a Time of Uncertainty

A. Dealing with the Unknown

i. Set short-term goals & expectations

ii. Prepare short-term forecast or projections to understand better l Company’s liquidity l If they can continue to stay in

business l If they need to close their doors

iii. Align current results with expectations

iv. Adjust if necessary

v. Disclose what was done and continue to assess

B. Hockey Stick Approach

i. Where a forecast starts with certainty and as it goes out there is less and less certainty

C. Valuation Risks While Preparing Projections

i. Ensure that: l There is documentation support

of all assumptions used l Unsupported assumptions are

investigated by the SEC l And enforcement action has been

taken

ii. Uncertainty can impact the way you pick probabilities and could have weighted cash flows

iii. Discount rate is taken into a place of risk premium to account for the uncertainty

D. IFRS vs GAAP

i. Under U.S. GAAP l Recoverability test l Applicable to amortized

intangible assets

ii. Under IFRS l Evaluation of fair value against

book value if there are indicators of impairment

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A. Highlights on SEC’s Perspective on Goodwill

i. Exposing preexisting accounting or disclosure improprieties

ii. Opportunity for issuers to engage in improper conduct l Manipulation of valuations l Taking a bath to avoid hanging

on of reporting that is not doing well

l Continuing to hide things l Deferring in the hopes of

recovery

iii. Looking at disclosures around changes of l Internal controls over financial

reporting l Material changes

B. SEC’s Statements to Filers

i. Sympathetic to personal circumstances putting pressure on internal controls, but due to those circumstances people need information timely

C. Todd Rahn’s Views

i. Be open with what is driving the change in the business

ii. Make those drivers clear to analysts and stakeholders

iii. Don’t go too far disclosing information that doesn’t need to be disclosed

iv. Be transparent about challenges or things that are coming up that will drive change in the business

“So they key is that internal controls … need to be functioning and treated as a priority, both within the company, and clearly it obviously already is, but within our regulatory regime.”

— Todd Rahn

VII. Working with the SEC Perspective

Outline (continued)

1–6

Discussion Questions

1–6

1. COVID-19: Are Your Financial Statements Infected? – Part I

l As the Discussion Leader, you should introduce this video segment with words similar to the following:

“In this segment, Todd Rahn and Chris Brown discuss industries that are at the greatest risk for impairment triggered by the COVID-19 pandemic.”

l Show Segment 1. The transcript of this video starts on page 1–20 of this guide.

l After playing the video, use the questions provided or ones you have developed to generate discussion. The answers to our discussion questions are on pages 1–8 to 1–10. Additional objective questions are on pages 1–11 and 1–12.

l After the discussion, complete the evaluation form on page A–1.

1. As a result of the COVID-19 pandemic, many industries and companies have already and are expected to continue reporting impaired goodwill on their balance sheets. What are the accounting rules regarding goodwill testing? How have the recent events impacted your company’s recorded goodwill, if at all?

2. Among the many industries to be impacted by the COVID-19 is the commercial real estate industry. What have been the effects of the pandemic on this industry? What has been the impact to you, your role and your organization?

3. A common effect of many economic downturns is asset impairment related litigation. What are the lessons learned from impairment related litigation and enforcement actions that occurred in the last recession and more recently from the COVID-19 pandemic? Has your organization had any experience in litigation related to asset impairments?

4. U.S. GAAP requires good will to be tested for impairment. What are the steps and factors companies should consider when testing for impairment? How does your organization test for impairment?

You may want to assign these discussion questions to individual participants before viewing the video segment.

Instructions for Segment

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For additional information concerning CPE requirements, see page vi of this guide.

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5. When it comes the issue of testing with specific reporting units of a company, there are certain factors companies should consider. What are some of the factors companies should evaluate at the reporting unit level? What factors does your organization consider?

6. During the pandemic, many companies faced challenges creating forecasts and projections. What are some of the issues and risks executives face when preparing future forecasts and valuations? How has your organization's ability to prepare forecasts been affected?

7. Companies should also make it a point to make sure they understand the SEC’s views on the treatment of goodwill in the current environment. How can companies comply with the SEC’s early warning disclosure requirements?

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s1. As a result of the COVID-19 pandemic,

many industries and companies have already and are expected to continue reporting impaired goodwill on their balance sheets. What are the accounting rules regarding goodwill testing? How have the recent events impacted your company’s recorded goodwill, if at all? l Under U.S. GAAP, private companies

that don’t elect to amortize goodwill and all public companies must test for impairment at least annually or, more often, when “triggering events” occur

l Types of Triggering Events v Negative cash flows from

operations v Loss of key customers v Unanticipated competition v Economic downturns (e.g.,

pandemics) l Accounting Standards Update (ASU)

2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment v Became effective January 1, 2020

for calendar year end public companies

v Simplifies the accounting for goodwill in periods subsequent to initial recognition by: k Allowing goodwill to be

amortized k Simplifying impairment testing

v May be applied to existing goodwill as well as goodwill arising from future business combinations

l Property, plant and equipment and other intangible assets are also required to be tested for impairment v Assets are considered impaired and

an impairment must be recognized when the book value, or net carrying value, exceeds expected future cash flows

l Participant response based on personal/organizational experience

2. Among the many industries to be impacted by the COVID-19 is the commercial real estate industry. What have been the effects of the pandemic on this industry? What has been the impact to you, your role and your organization? l Residential real estate

v Housing prices in the suburbs have increased as people seek to move outside of cities and suburban locations

l Commercial real estate v Lack of investments by companies

and government agencies in new office space will create excess inventory and also impact other industries (e.g., construction)

v Unmet lease obligations by commercial tenants or lack of rental income k Requires banks to make loan

loss provisions under Current Expected Credit Losses (CECL) model

l Lease modifications may be expected in the future which will require companies to take an immediate loss for the entire expected life of the lease

l ASC Topic 842 – Leases makes it easier for public companies to consider: v Lease modifications v Extensions and changes in terms

l Participant response based on personal/organizational experience

Suggested Answers to Discussion Questions1. COVID-19: Are Your Financial Statements Infected? –

Part I

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s3. A common effect of many economic

downturns is asset impairment related litigation. What are the lessons learned from impairment related litigation and enforcement actions that occurred in the last recession and more recently from the COVID-19 pandemic? Has your organization had any experience in litigation related to asset impairments? l Great Depression

v Financial services industry was mostly impacted

v SEC increased scrutiny of reporting unit determinations & timing of impairments

v Increased SEC comment letter inquiring into goodwill impairment matters & enforcement actions

l COVID-19 v The industry range is much

broader v SEC more focused on timing,

disclosures and indicators of early warning signs

v Increase in SEC comment letters inquiries into goodwill impairment matters & enforcement actions are expected

l Participant response based on personal/organizational experience

4. U.S. GAAP requires goodwill to be tested for impairment. What are the steps and factors companies should consider when testing for impairment? How does your organization test for impairment? l FASB – Two-Step Test

v Determine if there is a decline in fair value

v Allocate that fair value against the balance sheet

l Companies should: v Ensure they have a clear

understanding of what reporting units are within their business

v Identify indicators that may lead to impairment

v Look at impairment of other assets l Participant response based on

personal/organizational experience

5. When it comes to the issue of testing with specific reporting units of a company, there are certain factors companies should consider. What are some of the factors companies should evaluate at the reporting unit level? What factors does your organization consider? l Identifying the Right Reporting Units

v Portion of the business owned by somebody within the organization

v Are there financial results of the reporting unit they are responsible for?

v Economic characteristics v Use trend analysis and results over

time to ensure k Fairness k Objectivity k Use of appropriate judgment

l Reporting Units & Restructuring v Reallocate goodwill v Document the basis and

determination of the approach v Ensure you are not hiding

goodwill impairment or taking a higher goodwill impairment than needed

v Consistency is key l Participant response based on

personal/organizational experience

Suggested Answers to Discussion Questions (continued)

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s6. During the pandemic, many companies

faced challenges creating forecasts and projections. What are some of the issues and risks executives face when preparing future forecasts and valuations? How has your organization's ability to prepare forecasts been affected? l When it comes to forecasting and

valuations executives should: v Set short-term goals &

expectations v Prepare short-term forecast or

projections to understand better k Company’s liquidity k If they can continue to stay in

business k If they need to close their doors

v Align current results with expectations

v Adjust if necessary v Disclose what was done and

continue to assess l Valuation Risks While Preparing

Projections v Ensure that:

k There is documentation support of all assumptions used

k Unsupported assumptions are investigated by the SEC and enforcement action has been taken

v Uncertainty can impact the way you pick probabilities and could have weighted cash flows

v Discount rate is taken into a place of risk premium to account for the uncertainty

l Participant response based on personal/organizational experience

7. Companies should also make it a point to make sure they understand the SEC’s views on the treatment of good will in the current environment. How can companies comply with the SEC’s early warning disclosure requirements? l SEC’s Perspective on Goodwill

v Exposing preexisting accounting or disclosure improprieties

v Opportunity for issuers to engage in improper conduct k Manipulation of valuations k Taking a bath to avoid hanging

on of reporting that is not doing well

k Continuing to hide things k Deferring in the hopes of

recovery v Looking at disclosures around

changes of k Internal controls over financial

reporting k Material changes

v SEC has stated that it is sympathetic to personal circumstances putting pressure on internal controls, but due to those circumstances people need information timely

l Per Todd Rahn companies should: v Be open with what is driving the

change in the business v Make those drivers clear to

analysts and stakeholders v Don’t go too far disclosing

information that doesn’t need to be disclosed

v Be transparent about challenges or things that are coming up that will drive change in the business

l Participant response based on personal/organizational experience

Suggested Answers to Discussion Questions (continued)

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1. Under current U.S. GAAP, __________ must test for impairment at least annually.

a) all public companies

b) all private companies

c) only private companies that elect to amortize goodwill

d) only public companies that elect to amortize goodwill

2. ASU 2017-04 Intangibles – Goodwill and Other (Topic 350):

a) only allows for amortization of goodwill existing as of the effective date of the ASU

b) only allows for amortization of goodwill arising from business combinations arising after the effective date of the ASU

c) allows for any goodwill on the balance sheet to be amortized

d) has more complicated impairment testing provisions than previous standards

3. Current guidance governing accounting for leases:

a) does not consider the accounting treatment of lease modifications

b) makes it harder to consider extensions and changes in lease terms

c) is expected to be able to adequately address the potential future events in commercial leases arising from COVID-19

d) is not as adept as the predecessor standard in addressing the accounting treatment of lease defaults and modifications

4. When assessing any potential impairment to goodwill, companies:

a) must apply an undiscounted test for impairment

b) should allocate any impairment or decline in fair value against the entire balance sheet

c) should only be concerned with their material reporting units or segments

d) need not review any other assets for impairment

5. Indicators of potential impairment to good will include decreases to all of the following EXCEPT:

a) litigation related to asset impairment directed at the company

b) sales

c) amount of traffic directed to the company's website

d) revenues or gross profits

6. When it comes to forecasting and preparing valuations in the current environment, companies:

a) should try to focus on the long term

b) need not be considered with liquidity

c) should ensure they have documentation of for all assumptions used

d) all of the above

7. __________ requires a recoverability test as the first step in determining whether assets are impaired.

a) Only International Financial Reporting Standards (IFRS)

b) Only Generally Accepted Accounting Principles (GAAP)

c) Both GAAP and IFRS

d) Neither GAAP nor IFRS

You may want to use these objective questions to test knowledge and/or to generate further discussion; these questions are only for group live purposes. Most of these questions are based on the video segment; a few may be based on the reading that starts on page 1–13.

Objective Questions

1. COVID-19: Are Your Financial Statements Infected? – Part I

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8. As a result of the recent events, the SEC is most likely to be focused on which of the following issues?

a) ensuring CEO compensation does not exceed certain limits

b) auditor conflicts

c) disclosures around changes of material changes

d) timeliness of financial statement preparation

9. According to FTI, as a result of the COVID-19 pandemic, companies need to be concerned with ______ of their internal controls over financial reporting.

a) both the design and operating effectiveness

b) only the design effectiveness

c) only the operating effectiveness

d) according to FTI internal controls over financial reporting are not affected byCOVID-19

10. Which of the following is most likely considered to be a potential trigger necessitating a test of impairment to goodwill?

a) a change in the company's external auditors

b) replacement of the CEO

c) closing of branches in foreign locations

d) a sustained decrease in share price

Objective Questions (continued)

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FTI Consulting

The COVID-19 pandemic is, first and foremost, a public health emergency of enormous proportions. The humanitarian cost to our communities, our country and the world is vast, and at the time of this publication, still rising.

While safety and health care threats must come first, economic concerns follow shortly thereafter, as we all seek to minimize the impact on our businesses and our economy. Companies face many unknowns regarding the ability to continue critical operations, generate revenue, manage contractual obligations, obtain access to capital and credit, and available business interruption and other insurance coverage, to name a few.

Given the significant uncertainties in today’s global marketplace coupled with impacts across all geographies and industries, companies need to

comprehensively evaluate the impact of the crisis on their accounting, disclosures and internal controls.

Accounting & Reporting Issues Potentially Impacted by COVID-19

Asset Impairments

Adverse events may trigger the need to prepare an impairment analysis. In these cases, many companies will need to reevaluate the inputs used in impairment models for assets, particularly with respect to expected future cash flows. Impairment issues can take many forms, including:

— Goodwill & Intangible Assets – Assessment of impairment for goodwill and indefinite-lived intangibles in accordance with ASC 350, as well as finite-lived intangibles in accordance with ASC 360.

1–13

Self-Study Option

Reading (Optional for Group Study)

COVID-19 IMPACTS ON ACCOUNTING, DISCLOSURES & INTERNAL CONTROLS

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l In order to ensure adherence to NASBA guidelines regarding self-study, the CPA Report and CPA Report Government/Not-for-Profit Self-Study Professional Education Centers are no longer available. Customers should contact their company administrators for information on taking course exams and receiving CPE credit for the courses.

l Customers may contact Kaplan Financial Education at cpesupport@kaplan.com to obtain certificates previously earned through the CPA Report Self-Study and CPA Report Government/Not-for-Profit Self-Study Professional Education Centers.

l Customers interested in the self-study format of the CPA Report can find information on Kaplan Financial Education's self-study libraries at Online Accounting CPE Courses.

CPA Report Update

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— Trade Receivables – Evaluation of historical loss rates to determine if and how they differ from what is currently expected over the life of current trade receivables (on the basis of current conditions and reasonable and supportable forecasts about the future).

— Inventory – Assessment of excess and obsolete inventory reserve requirements in accordance with ASC 330.

— Held to Maturity Debt Securities – Assessment of reasonable and supportable forecasts required to support revisions of estimated impairment losses resulting from changes in market conditions.

— Fixed Assets – Assessment of impairment in accordance with ASC 360 that may result in recording an impairment charge and/or a change in useful lives.

— Capitalized Software – Assessment of impairment of software development costs in accordance with ASC 985- 20 for costs of software to be sold, leased or marketed, or in accordance with the internal use software guidance.

Fair Value Measurement

The current volatility in the economy and financial markets will likely present challenges in determining the appropriate inputs to fair value measurements in accordance with ASC 820 for assets and liabilities such as investments and certain financing obligations, similar to past periods when transactions were not orderly, such as during the 2007-2008 credit crisis.

Hedge Accounting

The uncertainty in the current business environment may also result in the need to reassess the probability of hedged transactions occurring, which could result in the determination that hedge accounting is no longer applicable under ASC 815.

Debt Modifications & Loan Covenants

Many companies are experiencing negative impacts on operations and cash flows that could adversely impact the ability to service debt or comply with debt covenants. Such companies may need to obtain waivers for covenant violations, modify existing debt arrangements or enter into new financing arrangements. Challenging accounting and presentation issues can include the following:

— Debt Modification Vs. Debt Extinguishment – Assessment of whether an amendment to a debt arrangement should be treated as a debt modification versus a debt extinguishment in accordance with ASC 470-50.

— Troubled Debt Restructuring – Assessment of whether a debt restructuring meets the criteria for troubled debt restructurings in accordance with ASC 470-60.

— Balance Sheet Classification – Assessment of how covenant violations, covenant waivers, post-balance sheet refinancing transactions and subjective acceleration clauses affect short-term vs. long-term debt classification.

Revenue Recognition

Companies are required to estimate variable consideration at contract inception and to revisit those estimates at each subsequent balance sheet date throughout the term of the contract. In many cases, the changing business environment will require reassessments of those variable consideration estimates in accordance with ASC 606. In addition, assessments may need to be made of potential impairment of costs to obtain or fulfill a sales contract.

Insurance Recoveries

Companies are scrutinizing their business interruption and overall insurance coverage and preparing claims in light of the COVID 19 situation. Insurance recoveries give rise

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to financial reporting matters including recognition and disclosure of anticipated reimbursements in accordance with the ASC 450-30 gain contingencies guidance, as well as the income statement, balance sheet, and cash flow classification of any recoveries.

Bankruptcies & Restructurings

Some companies that are negatively impacted may need to restructure in order to reduce operating expenditures such as facilities and workforce, which may include asset impairments, lease termination costs and dealing with workforce termination benefits. COVID-19 is also sure to cause some companies to file for Chapter 11 bankruptcy, which involves specific accounting and financial reporting implications, both during the bankruptcy and upon emergence from bankruptcy.

Financial Statement Disclosures

Companies will need to assess many potential U.S. GAAP disclosure requirements, including loss contingencies in accordance with ASC 450-20, risks and uncertainties in accordance with ASC 275, subsequent events in accordance with ASC 855 and going concern in accordance with ASC 205-40. In addition, public companies will need to assess the timeliness, accuracy and sufficiency of disclosures around the impacts of the pandemic on their business, including in the Management’s Discussion and Analysis (MD&A) and Risk Factor sections of their Form 10-K and 10-Q filings.

Internal Controls Over Financial Reporting Implications

Companies will need to evaluate both the design and operating effectiveness of their internal controls as this pandemic changes their daily operations. For example, closures of facilities and employee absence due to responsibilities at home or illness may result in a lack of available information or ability to maintain the effectiveness of internal controls. In certain cases, this can lead to a high-risk environment where normal controls are being bypassed in order to meet

governmental or customer demands. This may require implementing new controls or reliance on other mitigating controls for which the operating effectiveness has not been tested.

On top of these constraints, the regulatory demand for information is unwavering, as referenced in SEC Chairman Jay Clayton’s comments, on the SEC’s order (Release No. 34-88318) providing conditional regulatory relief, which requires registrants to “provide investors with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus to the fullest extent practicable to keep investors and markets informed of material developments.” As new or increased risks emerge, companies may need to quickly modify their controls or design and implement new ones. This may result in additional required disclosure to stakeholders, including for changes to the control environment in SEC filings.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or any of its respective affiliates. FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and is not a certified public accounting firm or a law firm.

FTI Consulting is an independent global business advisory firm dedicated to helping organizations manage change, mitigate risk and resolve disputes: financial, legal, operational, political & regulatory, reputational and transactional. FTI Consulting professionals, located in all major business centers throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges and opportunities.©2020 FTI Consulting, Inc. All rights reserved. www.fticonsulting.com

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Impairment considerations in the current environment

What industries are at the greatest risk for impairment issues? Oil & gas has been hit hard and the current environment has exposed Preexisting weakness in this market, primarily excess supply. Reduced travel and supply chain issues created by COVID-19 have significantly decreased demand.

In the retail sector, more than 26 major retailers have filed bankruptcy in 2020. Retailers with a strong internet presence have managed to weather the storm while retailers with traditional models have not been able to survive. Lord & Taylor, JCPenney, Brooks Brothers and J Crew are just a few of the prominent entities that have sought bankruptcy protection.

Hospitality and tourism have also been severely impacted. Hertz has filed bankruptcy and others may follow soon. However, there is some hope for certain sectors as Americans are starting to travel again. The US Bureau of Transportation Statistics (BTS) noted that Americans took over 184 million trips at least 50 miles from home over the Labor Day weekend1. That is up 10% over 2019.

While there is progress, we noted that air travel still has a long way to go to recover to pre-COVID levels with Labor Day travel still down 40% from 20192. Unless action is taken by congress to replicate the subsidies given to the airline industry in the CARES Act, it is estimated that more than 80,000 airline employees will be furloughed. Unfortunately, based on current bookings it does not appear that Americans will return to flying at pre-COVID levels anytime within the next year.

Stay-at-home orders have forced many businesses to shut down or operate at levels that are not sustainable. Many small businesses will not survive lockdown conditions. The impact is hardest on small businesses who don’t have the capital to sustain their business while complying with requirements mandated by state governments to maintain social distancing and other COVID related practices.

In manufacturing and Aerospace, there have been immediate and significant declines in demand. Boeing’s CEO expects that it will take lost demand 3-5 years to recover.

Meanwhile, large banks have taken significant loan loss provisions as they revise their forecasts to consider potential losses in commercial real estate and consumer lending. We have noted that some goodwill impairments have already recorded for several banks.

What are the most common trigger events that require an assessment of goodwill?

If the fair value of the reporting unit is more likely than not lower than its carrying value, it may trigger an impairment test. Among the many potential triggers that necessitate a test of impairment of goodwill, the most likely include

l Current Macroeconomic conditions

l Industry specific and market considerations

l Events affecting a reporting unit

l Sustained decrease in share price

l Cost factors

l Overall financial performance

In this economic environment, qualitative tests will likely result in interim impairment testing.

What lessons can be learned from impairment related litigation and enforcement actions that occurred in the last recession?

First of all, we know litigation spikes significantly in impacted industries. In the great recession it was the financial service space that dominated securities class actions. In the current environment, it is likely that many more industries will be impacted as we alluded to earlier. During the last recession, the SEC dramatically increased its scrutiny of reporting unit

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determinations, timing of impairments and the calculation of the ultimate charge. We expect that the SEC will be very focused on timing of impairments, disclosures and indicators of early warning signs. During the last recession comment letters from the SEC inquiring into goodwill impairment matters spiked significantly as the recession wore on. This was followed by a spike in enforcement actions. We should expect the same this time around. In relation to COVID, we have noted that the SEC’s efforts to forewarn issuers about the need for transparent and informative disclosures appear to have been heard. We have noted fewer comments from the SEC with regards to COVID-19 disclosures than may have been expected.

It’s good to remember that the SEC and other stakeholders will use the benefit of 20/20 hindsight to evaluate the sufficiency of disclosures and timing of impairments. The big question issuers should be asking is “why now”? Despite the numerous distractions and pressure on management, they need to be prepared for that level of scrutiny. This means thorough and diligent documentation of key assumptions, changes and thorough analysis of timing. This documentation needs to be contemporaneous to allow internal controls over significant judgements and estimates to be deemed effective.

In its May speeches, Steven Peikin, Co-Director, Division of Enforcement, May 12, 2020 noted the following, “Previous economic downturns proved that stresses on the financial conditions of issuers may raise the risk to investors from financial statement and issuer disclosure frauds in two ways:

l exposing pre-existing accounting or disclosure improprieties, (issues with prior allocation of assets among reporting units or previous ˆvaluations)

l leading issuers to engage in improper conduct (current manipulation of valuations)

The SEC also indicated that it would be looking for disclosures, impairments, or valuations that may attempt to disguise

previously undisclosed problems or weaknesses as coronavirus-related.

Finally, the SEC is also, “…looking to evaluate the adequacy of disclosure of material changes in disclosure controls or internal controls over financial reporting. Changes to the business and additional uncertainties may result in additional risks or material misstatement to the financial statements in which new or enhanced controls may need to be implemented to mitigate such risks…”

What are the key valuation risks that should be carefully considered by reviewers of impairment?

The level of uncertainty is greater than ever. Uber is a great example of this uncertainty in their steps to withdraw earnings guidance. This significant uncertainty has to be reflected in the assessment of impairment and the underlying calculations required in an impairment analysis.

The risk of engineered valuations is significant. Often 50% or more of the value related to forecasted cash flows is related to terminal value and expected perpetual growth. These values and expectations are often based on the last year of a cash flow analysis. Experience tells us that management tends to predict cash flows in the shape of a hockey stick with immediate periods having slow growth which turns into more sustained higher growth as management’s plans take hold.

Reviewers of these valuations should carefully consider the weight of evidence supporting the inputs and assumptions underlying critical valuations. Unsupported or aggressive assumptions should be challenged and resolution of review controls should be well documented. Clear focus should be on the most significant elements of the estimate that drive volatility and growth.

When asked how to deal with uncertainty, we believe that uncertainty should be built into the weighting of various probability weighted cash flows and the discount rate. There should be clear articulation of how discount rates are derived and why (or why not) they have changed. No change in the

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discount rate used from previous assessments could be a red flag given the rapid economic changes observed during 2020.

As such, companies need to strongly consider whether a change in the historical discount rate is needed. An additional risk premium may be required to contemplate significant uncertainty in current and future expected economic conditions.

Finally, management should be thoughtful to ensure that forecasts used for various operating and financial reporting reasons are consistent. Internal controls should be designed to ensure that the expectations of management used in forecasting for any need are supported and consistent.

How does the impact of CECL impact the assessment of impairment of financial assets?

For those that have adopted, primarily financial institutions, CECL requires an estimated lifetime losses. The risks inherent in performing valuations of reporting units are also inherent in CECL estimates. The uncertainty introduced by COVID and current market conditions both need to be considered in the estimate of lifetime losses for financial instruments. For those that adopted CECL at the beginning of the year, significant shifts from the original forecasts used are likely necessary to take into account unforeseen regulatory action, a significant increase in bankruptcies and the uncertainty of when and how specific industries as well as the global economy will recover. These uncertainties will extend to the domestic and global economy as well. As a result, we expect that with so much uncertainty and the significant risk related to forecasting that banks will look to peers and closely monitor how the estimates of the large sophisticated institutions are reported. It is not unreasonable to believe that absent a few differences to unique portfolios, management of banks will feel safer being within a reasonable range of a large number of peers.

What are the related pressures, incentives and opportunities to commit financial reporting fraud that may need to be considered in an entity’s Risk Assessment?

Numerous pressures on management include meeting sales targets, loss of income could result in immediate financial hardship, maintenance of debt covenants to avoid default, pressure to meet market expectations or simply staying employed.

The current environment and uncertainty of the future provides opportunities to defer or hide previous issues. Examples include using aggressive estimates, intentionally restructuring reporting units solely to avoid impairments, or the cleaning up of prior accounting issues (i.e. a big bath). There is also the opportunity to take overdue impairment charges and blame the current business environment. Conversely, use of ultra conservative estimates creates an opportunity for future earnings management. Finally, restructuring and engineering reporting units to trigger current period impairments to avoid a future drag on earnings is also a possibility.

Aside from impairment, what other reporting considerations should be considered?

Executive Compensation will be closely scrutinized. As an example, the timing of stock grants could become questioned relative to volatile market events (forfeitures, unclear performance conditions, modifications, etc.),

Subsequent Events can present a challenge. For instance, there could be challenges in separating recognized from unrecognized subsequent events based on what conditions existed at the balance sheet date. Further, the consideration of clear and transparent disclosures on COVID-19 impact on the financial statements is complex and requires significant judgment. As previously noted the SEC will be looking for disclosures, impairments, or valuations that may attempt to disguise previously undisclosed problems or weaknesses as coronavirus-related.

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The reality of Going Concern should also be considered. Additional disclosures may be required if an entity determines COVID-19 impacts its ability to continue as a going concern. Auditors, shareholders, debtholders and others will be focused on these required assessments.

In terms of revenue recognition, updating estimates for variable consideration will require significant judgement and likely additional disclosures. Terminations involving variable consideration are likely to drive questions from stakeholders.

Finally, we noted a significant increase in the SEC’s evaluation and comments around non-GAAP disclosures. Careful assessment of how COVID-19 impacts may qualify/disqualify as a non-GAAP measure is needed. Clear and transparent disclosures of non-GAAP metrics should be thoughtfully explained and reconciled back to GAAP measures. Management should expect that these measures will be closely scrutinized.

Our final message

The current environment has created significant pressures on management to find ways to sustain their businesses in unprecedented times. This pressure provides potential rationale for management to take advantage of opportunities to manage earnings through various methods. The methods most likely to be utilized relate to judgmental estimates subject to subjective management review controls. It is incumbent on fiduciaries to ensure that an appropriate risk management assessment that considers these unprecedented risks has been performed. Further, management should take additional steps to reinforce ethical behavior to alleviate the pressure facing middle management and operations that are naturally going to occur in a business environment such as this. Companies with the strongest ethical cultures will have a significant advantage over those that have not emphasized the need to adhere to the modern-day expectations of the market, the public and shareholders alike.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or any of its respective affiliates. FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and is not a certified public accounting firm or a law firm.

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1 https://www.bts.gov/covid-19/labor-day-weekend

2 https://www.tsa.gov/coronavirus/passenger-throughput

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SURRAN: In the era of a global crisis due to COVID-19, many economists expect 2020 to be the year where we will experience the worst recession since the Great Depression.

Many industries, such as oil and its gas, retail and manufacturing, hospitality, portions of the transportation sector, tourism, aerospace manufacturing and many others have reported goodwill impairment in the first two quarters of 2020 and more impairments are likely to spike before the end of the year.

Under U.S. GAAP, Generally Accepted Accounting Principles, private companies that don't elect to amortize goodwill and public companies must test for impairment at least annually or more often when "triggering events" occur and if impaired, they need to write down goodwill. A triggering event includes negative cash flows from operations, loss of a key customer, unanticipated competition or an economic downturn such as a pandemic!

In 2017, FASB, the Financial Accounting Standards Board, issued Accounting Standards Update (ASU) 2017-02, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The standard was effective January 1, 2020 for calendar-year end public companies, and ironically, the COVID-19 pandemic came at a time of rule simplification.

ASU 2017-02 simplifies the accounting for goodwill in periods subsequent to initial recognition by (a) allowing goodwill to be amortized, and (b) simplifying impairment testing. Note that the alternative permitted in this ASU may be applied to existing goodwill as well as goodwill arising from future business combinations.

As we are trying to adjust to a new normal, financial professionals are striving to understand the impact of the pandemic in financial reporting, especially when it comes to asset impairment. In addition to goodwill, property, plant and equipment and other intangible assets need to be assessed for impairment indicators.

A test of recoverability needs to be undertaken and if the carrying amount of the asset or asset group exceeds the undiscounted future cash flows, then under U.S. GAAP, companies need to measure the impairment and an impairment loss needs to be recognized.

WILLIAMS: The negative economic impact of the virus is certainly considered a triggering event and justifies an impairment test on Long--lived assets or asset groups for most industries. Todd Rahn, senior managing director and lead of accounting advisory practice on the west coast, and Chris Brown, senior managing director from FTI Consulting, start our segment by discussing industries that are at the greatest risk for impairment issues.

RAHN: There are a number of industries, obviously, that have been impacted by 2020, and the impact of the pandemic. Clearly, frankly, no industry has been left untouched. So that's the first thing is that as we all think about impairment, and value that is on our balance sheet, that everyone needs to be taking a close look at even areas that probably haven't been a focus in the past. For me being in the Bay Area, technology and life

Video Transcript1. COVID-19: Are Your Financial Statements Infected? –

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t sciences are top of mind. And we all know that that value has been doing very well, especially in the public markets.

With actually having one of the banner years for IPOs in 2020, which is a little bit unexpected obviously given where we were earlier in the year.

But that said, for those in the industry, in technology and life sciences that may have particular issues or not necessarily, quote, unquote, "benefitting," from what's going on in the current environment.

What's important to remember is that a lot of the value for those companies is locked up in intangible assets. And that includes goodwill, intangible licenses or other technology that's been acquired over time. And all of those need to be considered and looked at very closely.

WILLIAMS: Chris Brown gives us his views.

BROWN: In addition to the industries that Todd mentioned, there's been many that have been impacted. But oil and gas come first to mind. There are pre-existing weaknesses in the market already due to excess supply. And that's been exacerbated by COVID-19 and the related decrease in demand.

Retail has been hit significantly. Over 26 major retailers have filed bankruptcy so far in 2020. Entities like Lord and Taylor, JCPenney, Brooks Brothers among many. And those that are surviving have a strong online presence and came into COVID with that strong presence. And that's really been essential to their survival.

Or the hospitality and tourism industry has been significantly impacted. Labor Day travel is expected to be down 70% year over year. So you have entities like Hertz who filed bankruptcy, and you see cuts at the major airlines. Hotel chains as well.

Portions of the transportation sector have also been impacted. Uber for example, laid off 3,000 employees, closing 45 offices. And that was withdrawn guidance going forward because of their inability to predict what actually is going to happen. You couple that with manufacturing aerospace, and then even in the banking sector, I think there's some risks there. We've seen some goodwill impairments already. So certainly, it's a much wider swath than we saw in the great recession.

WILLIAMS: One other industry severely impacted by the pandemic in that they face not only impairment, but also lease modifications, is real estate. Todd and Chris give us their thoughts.

RAHN: As far as the real estate industry, a couple things to note. I would say first is that we've all been witnessing in our personal lives the continued push of folks to move actually out of the cities.

In fact, we've seen house prices for example on the residential side, skyrocket in many places outside of cities and suburban locations, and even further out. Because remote to work and other situations allow that to occur, and probably will. In fact, you have companies such as Google, Facebook, Twitter, and others that are telling companies that that the employees can be located at least for the next year outside of their normal working location.

So that for one, I think, impacts anybody that's involved in the housing industry. That said, the volume that that brings actually is positive, right? Is that there's a lot of volume that's happening both on the sell side in cities, and buy side further out.

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t But the big story, I think, for real estate is commercial. On the commercial side, you just don't have obviously people in physical locations. So companies, government agencies, and others are not investing in those offices, because there's no need to. So that is going to create a massive glut of space, especially within the city environments and any kind of office locations. And that adversely has a big and wide swath of impact on companies that are either contractors, construction, or that they're not involved in that commercial real estate.

But number one would be, those that actually hold that square footage, leasing it. And that's going to create a number of issues related to either lease obligations if you're a tenant. Or if you're a landlord, how do you fill that space in your revenue line?

If you look at what the large banks have been providing as far as loan losses, you see massive loan loss provisions particularly in the second quarter under CECL, which are lifetime estimates of losses. And a big factor that is being driven by commercial real estate.

So it's kind of a leading indicator before the fire really gets to the door of what is expected by those who have significant financial interests in commercial real estate.

WILLIAMS: Before we go back to our discussion on asset impairment, it is important to raise one question relating to lease modifications for public companies that have already adopted the lease standard and the impact on private companies, even though the standard has been extended to 2021.

BROWN: I think if you look at again, what the large banks have been taking relative to loss provisions, you can see there's an expectation that that income that we were expecting from leases is just not going to be what they expected.

I think we should expect modifications. Which again, when those happen under the current rules, you take an immediate loss for the entire expected life of the lease. So I think we've seen some, and I think as the year continues, we are going to expect to see a lot more.

RAHN: Public companies that have adopted 842. That provision was under the valuation and work for a decade. It was a long, long process and also included the ISB obviously in aligning with IFRS. Topic 842 in my view is more built for scenarios like this.

It makes it a little bit easier to consider lease modifications. It also makes it easier to consider extensions and changes in terms. And certainly, as we saw earlier in the year related to, as you mentioned, private companies.

The FASB and the SEC have proven that they're willing and able to provide accommodations. And so we may not have seen the last of those as this continues to push through the system. Not indicating that I'm aware of any coming, it's just that in applying 842, taking into account those modifications, and then the standard is frankly being better built, then 840 is a good sign that the system will handle it a little better than it has in the past.

SURRAN: It is interesting to think that twelve years ago, almost to the day, we went through another financial crisis. In September 2008, Lehman Brothers filed for bankruptcy, Bank of America acquired Merrill Lynch and the Federal Reserve bailed out AIG to prevent its collapse, as AIG had losses and collateral obligations amounting in billions of dollars they couldn't cover. A massive bailout plan was approved by Congress and

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t later in the month, the Treasury Department guaranteed U.S. money market funds… and that was considered unprecedented!

In February 2009, President Obama signed into law the American Recovery and Reinvestment Act, which provided approximately $800 billion in stimulus to boost the economy.

In July, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in an effort to improve financial stability and consumer protection.

Fast forward to 2020, the COVID-19 pandemic forced governments around the world to create stimulus packages. The United States passed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, which is worth more than $2 trillion dollars, in order to help businesses, individuals and states deal with the economic crisis, while other countries took a different approach to spending and government assistance.

And yes, government assistance is always beneficial but it does not solve other problems companies are facing to stay afloat. One of the common themes in times of turmoil and economic downturn is lawsuits.

Historically, the most common lawsuits that U.S. companies face might be labor and employment, contracts or privacy suits.

Asset impairment-related litigations are always on the rise as companies are severely impacted during a financial crisis.

Litigations increase across various industries as people look for someone to blame or pay for the consequences of the pandemic in their lives, but even though the coronavirus may be to blame, it can't stand on trial.

WILLIAMS: Chris Brown discusses lessons learned from impairment related litigation and enforcement actions that occurred in the last recession.

BROWN: First, we know litigation spiked significantly in impacted industries. So in the great recession, it was the financial service space that was really dominating securities class actions.

In the current environment, it's likely that many more industries are going to be impacted as we alluded to earlier. It's just much broader.

Second during the last recession, the SEC dramatically increased its scrutiny of reporting unit determinations, timing of impairments, and the calculation of the ultimate impairment charges that the companies took. I think the SEC's going to be very focused on timing, disclosures, and indicators of early warning signs in this period. They've alluded to that.

In the last recession. We saw comment letters from the SEC inquiring into goodwill impairment matters spike significantly as the recession wore on. And then this was followed by a spike in enforcement actions as well. We should also expect that. It's good to remember that the SEC and other stakeholders are going to use the benefit of 2020 hindsight to evaluate the sufficiency of disclosures, as well as the timing of impairments.

The big question is why now? That's always the question that gets asked by auditors and other stakeholders. Despite the numerous distractions and pressure on management, you really need to be prepared for that level of scrutiny. This means thorough and diligent documentation of key assumptions, changes and the thorough analysis of timing.

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t WILLIAMS: Todd gives us his thoughts as to how COVID-19 has impacted the risk of impairment.

RAHN: What companies are faced with is, you kind of think back to fall of 2019, right? The economy is doing really well. There's been a lot of government policy that has driven towards growth. Stock market's doing great. The M&A market is very hot. I mean, just a lot of things were heading in that upward direction. I don't know about you, but I feel like 2019 now is about 30 years ago.

That is kind of how accounting feels too, is that you have that situation now completely shifted to a whole different world.

You take companies that were built around that economy in 2019, that may have been completely gone as we've already touched on. I mean, literally overnight certain industries and sectors are no longer around. So, what that drives is a lot of exposure to potential impairment charges, dealing with things like restructurings, going concern issues, all those types of things that I'm sure we're going to get into.

The key for me and the SEC made comments on this at least twice leading into the pandemic, with informal statements, is that the expectation there for all investors is that companies are being very transparent with what is driving risk in the organization. And specifically to impairments, which assets may be subject to additional impairment charges that they haven't taken already.

WILLIAMS: But what are the most common triggering events that required an assessment of goodwill?

BROWN: Among many of the GAAP lists, I think the key ones right now are macro-economic conditions, obviously with the way that COVID-19 has hit, and people staying home from work, we've got significant concerns there. Industry specific and market conditions also come into play. And you could have for example, companies that have reporting units that are really strong, and then reporting units that are not as strong in the current environment. And if an event is affecting reporting, that would be a trigger as well.

And then you also, for example, need to consider where the stock prices of a publicly traded company are, and if it has a sustained decrease in share price over time, that would be another trigger that needs to be considered.

WILLIAMS: Todd discusses how the assessment of goodwill impairment is required to be performed.

RAHN: We'll focus on the U.S. GAAP first. That's a great question as well, related to goodwill. So thankfully with goodwill, the test has been cleaned up a little bit over the past couple of years. The timing is perfect. As we all may remember, it's gone through a lot of different iterations from 15, 20 years ago being an amortization model where you kind of use an undiscounted test for impairment.

The FASB tried to fix that through this two-step test, which you would just determine if any particular reporting unit, which Chris touched on earlier, slash segment, slash company was experiencing a decline in fair value based on indicators. Then actually having to do an allocation of that fair value against all of the balance sheet. But thankfully that's all behind us. And it's a good thing.

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t So simply now, the number one thing again, Chris touched on this, that's critical for companies to focus on is, they have to make sure that they have a very clear understanding of what their reporting units are within their business.

If they have just one reporting unit for smaller companies, that's fine. But the expectation is certainly for larger private companies and public companies, they typically have multiple segments and multiple reporting units, which also can be within each segment. So the most critical first step is getting that question right.

From the public company perspective, the SEC is very focused on that. Because naturally what the FASB and the SEC are trying to prevent is hiding an impairment problem at a particular portion of the business, through the profitability of another portion of the business.

Then currently in the pandemic and the impact of COVID, it's very easy for that to happen. To have one portion of the company performing well, and an important portion of the company not performing well. So that reporting of your definition is critical.

It all gets into the similarity of those parts of the business, and there's various indicators. I can be happy to go through if that'd be helpful. But once you have that correct, every time there's an impairment indicator at least once a year, the company has to look at, "is the fair value of that reporting unit greater or less than its book value"?

Now under the current standard, once that's been done. And if it is a situation where they're reporting you as declined in value below the book value, then you just simply book that against goodwill until the goodwill has disappeared.

Naturally what's lost, I think sometimes in that, and why it was so easy for the FASB to pivot to that model, is because that naturally if you're doing that, and you have impairment indicators that are driving you to look at your goodwill impairment.

Of course, they may impact other assets that are on your balance sheet too. It's not to say that if you have an impairment problem, that means you ignore impairment of other assets.

It's just that in the calculation of doing the goodwill impairment charge, you're not forced to go through this, frankly, quite extensive process of evaluating your entire balance sheet. You just take the charge against goodwill, but also make sure you're keeping in mind that those indicators that drove the charge in the first place may also mean that your fixed assets, other intangibles or other areas are in fact impaired.

WILLIAMS: Todd elaborates further on impairment indicators through a real-life example.

RAHN: I will say that to add to those very often, what happens is say that in the budgeting process, or let's take a real-life example. Maybe a little more urgent example, is say a particular product line or something is not doing very well. Margins are down a certain percentage. It could be that it just has to be that those indicators, and it can be maybe that, as we said, sales are down, but also it can be because if there's a particular drop in the number of customers, or if it's a tech company, the amount of traffic to your website, or it can be any number of indicators, whatever you evaluate your business on is a good way to always look at that. How you discuss your business with analysts, that's the indicators that you always want to keep in mind in the context of GAAP.

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t It just has to be that those would present a situation that it's more likely than not that you have a potential impairment charge, is when you actually have to go in and do that.

Now, you're forced to do it every year, but that's when those indicators drive that conversation.

Other ones that I think about can relate to employment movements, it can relate to drop in gross profit, as I mentioned, drop in revenue. Those would be the main ones that typically will drive an impairment analysis.

WILLIAMS: But what are some of the important considerations when it comes to reporting units?

RAHN: On the topic of reporting units, as I mentioned, that is a critical assessment in everybody's eyes to make sure that you have the right ones identified. Once you do, and the way you do that, maybe I should start with, is that you determine, okay, are they similar to each other in general? So similar to segment analysis where you would have a similar thing in a segment, and you would have a similar thing in a reporting unit. So number one is, is that portion of the business owned by somebody within the organization? And then, immediately on the back of that is, are there financial results of the reporting unit they're responsible for?

Those are not really the hard ones. It's simple. If you look at a typical organization structure, most companies, whether they like to admit it or not, you can start to figure out what the hierarchy is, who owns what, and how much it relates to other portions of the business.

The place where it gets tough, and frankly, there just is judgment that you can't get out of it, is related to economic characteristics. So it's more common in segments that companies will, frankly, try to argue that segments need to be aggregated because they have similar economic characteristics, and the SEC has been harping on that for years, but let's not forget that there's very similar criteria that exist at the reporting unit level.

And so, you can, again, aggregate reporting units and you may in fact be required to, but to use trend analysis and results over time to ensure that you're looking at that in a fair and objective way and applying appropriate judgment, clearly the tension being that, okay, I have one particular reporting unit area, or potential reporting unit area of my business that's not doing so hot. Oh, but the margins have been somewhat similar, or say, even though the revenue trend line is going down, the margin is staying similar, that's typically not going to cut it.

What you have to do is look at all lines, margins, income, whatever's available, revenue. They need to be in a similar trend, very similar area of profitability, and that is what allows it to be aggregated. Otherwise, it needs to be evaluated separately and considered for a potential impairment charge.

WILLIAMS: Chris continues with his thoughts on reporting units.

BROWN: In addition to what Todd said, I think I'd point out that when you do a restructuring and you have reporting units changing, now there's an exercise where you would go through and reallocate goodwill. When those occur the SEC and any stakeholders will be very focused on the outcome of that and the basis for that approach and that determination, because you can hide goodwill impairment and you could also, for example, take more goodwill impairment, e.g., the big bath.

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SURRAN: We are nine months now into the pandemic and we can't see the end of it yet. The impact of the pandemic has been detrimental for most industries on a global scale and business valuations are becoming increasingly important in support of financial results, forecasting and financial planning as well as mergers, acquisitions and even litigations as we previously discussed. But how do you deal with the unknown?

A lot of companies were showing zero or close to zero revenues in the months of April through June and they are now starting to pick up but it is not nearly close to what revenues used to be.

Forecasting the long term may still be a thing of the past, as most executives are looking at short-term goals and expected results. Maybe looking at three or four months down the road is not so bad as it can be more realistic and has also become a new trend that valuation professionals are seeing.

A short-term forecast or projection gives executives a better understanding of how liquid they are, how to or if they will continue to stay in business or whether they would need to close their doors.

Valuation professionals expect a shift over the coming year as the uncertainty is reduced. Companies should align current results with their expectations, adjust if necessary, or disclose what was done and continue to assess.

WILLIAMS: Chris continues with the key valuation risks that companies should carefully evaluate.

BROWN: I think, first of all, it's just engineered valuations. So what I refer to it is the hockey stick approach, where you see certainty in the forecast, and then as it goes out, there's less certainty. And often what will happen is over 50% of the value of a reporting unit is going to be in the terminal value, which is assuming perpetual growth and that's often based on the projection of the last year.

So you want to make sure that whatever you're doing in that projection, you've got thorough documentation support for all of the assumptions. Unsupported assumptions have been really for entities that have been investigated by the SEC where enforcement action has been taken.

There's a probability issue here where you could have probability weighted cash flows, but how do you pick which probability is more likely in the scenario where there's a significant amount of uncertainty?

And so, we would look to the discount rate and you'd want to see that the discount rate is taken into a place of risk premium to account for that uncertainty, and I think that if there's no changes in the discount rate from previous evaluations, that should be viewed with skepticism and challenged.

WILLIAMS: Todd Rahn explains the differences between IFRS and U.S. GAAP.

RAHN: Between IFRS and U.S. GAAP, the models have been aligning over the past years, as we've talked about in other areas. So thankfully, there's not huge differences, but there still remains one that is a very significant area of impairment, and that relates to the impairment evaluation for assets that are amortized or depreciated.

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t What U.S. GAAP includes is this recoverability test, and so it applies to amortized intangibles, it applies to fixed assets that are depreciated, is that we compare, as a first step, again, that recoverability test in GAAP, we compare the undiscounted cash flows of those assets or asset groups, and we compare that to the book value. Clearly, especially given what Chris just said about the hockey stick, terminal value, and the significance that often discounts can have, particularly for companies that have more volatile businesses, the undiscounted cash flow stream can actually be substantially higher and different from a discounted stream.

And so, that just means that oftentimes with the U.S. GAAP, you just don't have, especially if it's a longer-term license, for example, that's an intangible, it's on your Balance sheet.

Most intangibles these days are amortized for U.S. GAAP. You're not going to have an impairment charge at first because you are still passing that recoverability test.

IFRS does not have that step. IFRS just looks at what the indicators are of impairment, and then if there are any, you evaluate the fair value against the book value and that's it.

And so, that can still create a pretty substantial difference. Other than that, mostly in the impairment area, it's mostly aligned, again, because of the efforts of the FASB and the ISB.

WILLIAMS: Chris Brown gives us some highlights on the SEC's perspective on goodwill in the current environment.

BROWN: I think the SEC has looked to previous economic downturns and focused on two items relative to potential issues with disclosure or mistiming of impairments.

The first is exposing preexisting accounting or disclosure improprieties. So in other words, there were issues before that now the current environment's going to allow it to get washed away and maybe focused and pointed at COVID.

So that will be a situation where they would go and look at the timing of that and look at the economic facts before, leading up, before COVID, to see if really there should have been something that should have been done earlier.

Secondarily, it's going to be, okay, well now, there's an opportunity for issuers to engage in improper conduct, either through manipulation of valuations, either positive or negatively, either taking a bath to avoid maybe some hanging on of reporting that's not doing so well, or to continue to hide things and maybe defer in the hope that things are going to recover when the economic reality says that now's the time to take the impairment.

Another area they're going to be looking through is the disclosures around changes of disclosure controls, as well as changes in internal controls over financial reporting. Material changes are required to be disclosed, and they're going to expect that some changes are being made in control structure to address changes in the risks that have evolved this year, which have been significant. So registrants and users should be really focused and cognizant of that, and those disclosures need to be made if material changes are made.

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RAHN: That is the million-dollar question. And early warning disclosures are something that are nothing new, meaning the scrutiny from the SEC, they have continued and always have been focused on, are companies telling investors enough early on so that they can make the appropriate decisions leading up to something that ultimately results in impairment charge, for example, under US GAAP?

And so, again, I point to statements by the SEC this year, and what they are asking for is a high bar, and what that means they are saying, "Listen, we understand that companies are taxed. We understand that everyone's dealing with personal circumstances, from the severe, to the inconvenience, that are putting a lot of pressure on internal controls."

But in the same breath, they're also saying, "Listen, this is exactly the type of situation where people need information and they need it timely.", and so they're putting a lot of emphasis on that.

So the way I would do it, and I could see my clients do it the most productive way, is that if there is some portion of the business, that's not doing well because of the current situation or just in general, is to be open with what is driving the change in the business.

So these are things that analysts want to know anyways, this is what stakeholders and companies want to know anyways. So do it in a way that is making it clear that there are drivers that are changing the business.

But at the same time, not going quote-unquote too far, I think the expression was tipping your hand. Is that not going so far as to, frankly, disclose information that doesn't need to be disclosed or hasn't been through the rigor of the internal control environment, and is something that's ready to be disclosed to the street. Because, believe me, all stakeholders want and believe companies should be working through their internal control environment fully before they're disclosing information out there. So that's the balance, but using things like earnings calls, public statements, obviously disclosures in management's discussion, analysis within 10Q's and 10K's, to be as transparent as businesses possibly can about challenges or things that are coming up that are driving changes in the business that people want to hear anyway. That will make it a lot easier to deal with things like announcements related to restructurings, impairments, and the such in the future periods.

WILLIAMS: And that brings up an interesting point, internal controls. Internal controls were put in place under a different environment, an office environment, which is very different from the one we are currently facing where companies are telecommuting and operating with a skeleton crew as several employees are still furloughed.

RAHN: So related to internal controls, exactly. That is exactly how I'd frame the problems. And I will say, the bit of a silver lining is I've actually been pleasantly surprised at the ability of companies to deal with the challenges of working remotely this year.

I frankly thought when this was all hitting, that there would be a lot of phone calls related to these changes. And I'm not saying that there isn't. There's clearly, every day, we're talking to companies that have a certain situation, but it seems like it's more driven and dealing with the actual matter at hand, meaning, okay, I've got a particular portion of my business is not doing well. Help me understand that.

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t Or I'm heading into a restructuring, how do I report that? Or worse. It could be whistleblower activities, which we'll get back to in a second, but in just dealing with it.

I think in the current environment we're in, for a lot of industries, not all of them, some of them you can, and we have to be so thankful to the workers that are actually out there in the streets, in the grocery stores, in the hospitals, dealing with all this because they have to be there.

The folks that don't have to be there though, the folks that are able to do things remotely, the current technology has continued to be a very productive way of dealing with the things that you're alluding to, and therefore internal controls are functioning well. So well, in fact, that one thing that's coming out of the changes in the workforce that we're seeing is that because companies are going through certainly negative situations.

People are being let go, people are changing jobs, they're moving, they're dealing with sickness in their home. It could be any number of situations, that we have seen, the SEC has seen, and we expect to continue to see, whistleblower activity as that continues to unfold because employees that are either unhappy with the current situation, or maybe weren't that worried about something, but now that everything's not going so well, they suddenly become a lot more worried, which is understandable.

So they key is that internal controls related to whistle blowers, that they need to be functioning and treated as a priority, both within the company, and clearly it obviously already is, but within our regulatory regime.

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Segment Two

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two 2. COVID-19: Are Your Financial Statements

Infected? – Part II

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Learning Objectives:

Segment Overview:

Field of Study:

Recommended Accreditation:Reading (Optional for Group Study):

Running Time:

Video Transcript:

Course Level:

Course Prerequisites:

Advance Preparation:

Expiration Date:

Accounting

December 12, 2021

Work experience in financial reporting or accounting, or an introductory course in accounting.

None

1 hour group live 2 hours self-study online

Update

“Fair Value Fundamentals – Asset Impairments and Business Combinations (FVFA4)” Accounting Continuing Education Kaplan – Mark D. Mishler, MBA, CPA, CMA

See page 2–13.

See page 2–20.

32 minutes

COVID-19 imposed certain pressures on C-suite executives and has created an environment that is ripe for fraudulent activity. Pressure is one of the three legs in the fraud triangle model that can lead someone to commit fraud, along with perceived opportunity and rationalization. It’s easy to talk in general terms about pressure, opportunity and rationalization, but how does each one surface in day-to-day operations, especially during the pandemic? Todd Rahn, senior managing director and lead of accounting advisory practice on the west coast and Chris Brown, senior managing director, from FTI Consulting, continue our segment discussing related pressures, incentives and opportunities to commit financial reporting fraud that should be considered in an entity's risk assessment from a corporate perspective.

Upon successful completion of this segment, you should be able to: l Identify types of pressures, opportunities and rationalization

executives are faced with, l Recognize challenges companies and auditors face on

inventory observations, l Identify impairment considerations of other non-financial

assets, and l Determine loan modification challenges under current

expected credit losses (CECL).

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A. Pressure Can be Created by

i. Unintended consequences of sales targets

ii. Loss of income

iii. Debt compliance

iv. Loss of customers even prior to COVID

v. Unrealized asset accumulation

B. Opportunities Can Occur When

i. Accounting records need to be fixed

ii. Aggressive estimates are used

iii. Reporting units are intentionally restructured

iv. Overdue impairment charges are taken

v. Reporting units are engineered to trigger impairment

C. Rationalization During an Economic Downturn

i. I can’t afford a loss

ii. It is temporary – I will fix it after COVID

iii. My family comes first – without these aggressive actions I would be furloughed or terminated

iv. Poor results are expected

v. Matching revenue with expenses is not a priority

D. Pressures Executives Face

i. Financial reporting

ii. Meeting sales targets

iii. Loss of income

iv. Maintaining debt covenants

v. Staying in compliance with agreements

vi. Meeting market expectations

vii.Keeping everyone employed

E. Opportunities to Manipulate Results

i. Making aggressive estimates l Showing overstated valuations

ii. Having intentional restructuring l To avoid impairments

iii. Cleaning up prior accounting issues

iv. Showing ultra conservative estimates l Trying to engineer some income

in the future

I. COVID Environment Ripe for Fraud

Outline

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A. Impairment Categories Raising Litigation Exposure

i. Forecasted optimistic cash flows l Evaporated overnight l Investor funding based on a

better financial position

ii. Aggressive projections l Coupled with stressful results

from the pandemic

B. How to Prevent a Litigation

i. Full disclosure is the best prevention

ii. Open lines of communication with your investors

C. Using the SEC as a Resource

i. Evaluate issues

ii. Open level of discussion with registrants

D. Increase in the IPO Market

i. Capital going into public markets l Instead of venture capital and

private equity

E. Impairment of Other Non-Financial Assets

i. Asset grouping l Fixed assets, intangibles &

others

ii. Customer acquisition costs

iii. Forecasting the cash flows of those asset groups

iv. Consistency of forecasting l Clear assumptions

F. Coordinating Between Business Areas

i. Ensure all scenarios are incorporated

ii. Apply probability thresholds to each one

iii. Provide appropriate fair value of a given asset

III. Managing Impairment and Litigation

A. Risk Assessment Considerations

i. Culture of the organization

ii. Setting the right tone

iii. Ethical standards of the entity

“…it's really critical for the C suite to think about the culture, and to think about the tone that they're setting because … employees from top to bottom are under stress.”

— Chris Brown

B. Risk Assessment Challenges for Auditors

i. Valuation

ii. Impairment

iii. Timing

C. Assets to Protect Against Theft

i. Intellectual property

D. CAMs & Inventory Observation Challenges

i. Critical to observe on or around the balance sheet date

ii. Challenges on the audit approach

iii. Needs to be highlighted as a CAM

II. Risk Assessment and Protecting Assets

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A. Considerations Prior to Loan Modification

i. Impact on incurred losses that results from changes in credit risk related to l Borrowers for which

modifications may occur

B. CARES Act Section 4013

i. Provides financial institutions temporary relief from TDR accounting and disclosure requirements

C. Agencies Statement

i. Short-term loan modifications made in good faith are not TDRs

D. CECL Methodology on Loans

i. Report in net income

ii. Amount necessary to adjust the allowance for credit losses

iii. For financial assets over their contractual term

E. Challenges for CECL

i. Difference of economic conditions in forecast

ii. Entities will have to adapt & change initial scenarios l To adverse scenarios

iii. Figuring out the real forecast

iv. Embed that into their estimates for loan losses over the lifetime of their portfolio

IV. Loan Risk and Credit Losses in the Time of COVID

A. COVID-19 Effects on Disclosures

i. Going concern

ii. Subsequent events

iii. Risk and uncertainties

iv. Additional disclosure requirements for filers

B. Going Concern Examples of Events

i. Negative financial trends

ii. Other indications of possible financial difficulties

C. Going Concern Analysis

i. Used to be the purview of auditors l Management was going along

ii. FASB shifted the responsibility to management l Assessing their own going

concern

D. Struggles Companies Face

i. With respect to going concern l Cash position l Consistent projections l Forming a conclusion regarding

going concern l Determine if a plan is needed

E. Other Reporting Considerations

i. Executive compensation

ii. Subsequent events l Separating recognition of a

subsequent event l Look at facts and circumstances

iii. Non-GAAP measures

iv. Being precise in how the impact of COVID-19 is addressed in a non-GAAP measure

F. Bankruptcy & Executive Bonuses

i. Reward for the stress and effort to make the turnaround happen

ii. Compensation gets questions if things don’t work out

V. Going Concern and Reporting Issues

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Outline (continued)

A. Todd Rahn’s Final Thoughts

i. Communication is key

ii. Avoid surprises with advanced reporting

iii. Ensure proper reporting

iv. Give early warning on impairments

v. Discuss with your auditor going concern

vi. Put emphasis on robust disclosures

vii.Be transparent with your employees

B. Chris Brown’s Final Thoughts

i. Challenging times call for exponentially greater pressures on management

ii. Financial professionals involved in critical valuations, impairment and fair value to l Document assumptions l Have adequate support

VI.Advice Looking Forward

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1. What types of pressures, opportunities, and rationalizations are executives faced with, especially during the pandemic? What types of pressures is your organization facing during the pandemic?

2. What challenges are companies and auditors facing right now? What audit challenges has the pandemic created in your organization?

3. What are some impairment considerations for other nonfinancial assets?

4. What loan modification considerations have resulted from the pandemic?

5. What impact does CECL (current expected credit losses) have on the assessment of impairment of financial assets? What challenges has your organization faced when adopting CECL?

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2. COVID-19: Are Your Financial Statements Infected? – Part II

l As the Discussion Leader, you should introduce this video segment with words similar to the following:

“In this segment, Todd Rahn and Chris Brown discuss pressures, incentives and opportunities to commit financial reporting fraud that should be considered in an entity's risk assessment from a corporate perspective.”

l Show Segment 2. The transcript of this video starts on page 2–19 of this guide.

l After playing the video, use the questions provided or ones you have developed to generate discussion. The answers to our discussion questions are on pages 2–8 to 2–10. Additional objective questions are on pages 2–11 and 2–12.

l After the discussion, complete the evaluation form on page A–1.

Discussion Questions

You may want to assign these discussion questions to individual participants before viewing the video segment.

Instructions for Segment

Group Live Option

For additional information concerning CPE requirements, see page vi of this guide.

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6. What disclosures should an organization include on the current and future effects of COVID-19 and what struggles are companies facing with respect to going concern? How do your organization’s disclosures enable an investor to understand how management is analyzing the impact of COVID-19 on the company’s operations and financial condition?

7. What are some other reporting considerations in light of the COVID-19 pandemic? What other reporting considerations will your organization include in its financial statements?

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sDiscussion Questions (continued)

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1. What types of pressures, opportunities, and rationalizations are executives faced with, especially during the pandemic? What types of pressures is your organization facing during the pandemic? l Pressure can be created by

l Unintended consequences of sales targets and/or incentives

l Loss of income that would entail financial hardships

l Loss of company revenue may mean a company cannot meet its obligations

l Debt compliance l Salespeople losing customers even

prior to COVID-19 l Companies accumulating

unrealizable assets l Staying in compliance with

agreements l Trying to keep everyone employed

l Opportunities can arise when l Accounting records need to be

fixed or “cleaned up” l Aggressive estimates are made to

prevent impairments and going concern disclosures l Showing overstated valuations

l Reporting units are intentionally restructured solely to prevent impairment

l Overdue impairment charges are taken

l Reporting units are engineered to trigger current period impairment to prevent drag of future impairment charges

l Having intentional restructuring l To avoid impairments

l Cleaning up prior to accounting issues

l Showing ultra conservative estimates l Trying to engineer some income

in the future

l Rationalization l “I can’t afford to show a loss” l “This is temporary, I will fix it

after COVID” l “My family comes first – without

these aggressive actions I would be furloughed or terminated”

l “The market doesn’t expect us to have a good quarter anyway”

l “What difference does it make if I put an expense in the wrong period right now”

l Participant response based on personal/organizational experience

2. What challenges are companies and auditors facing right now? What audit challenges has the pandemic created in your organization? l Physical inventories

l Auditors trying to figure out how to deal with the remote environment

l Companies facing the same challenges

l Protecting Assets l Massive incentives for fraud l Intellectual property that is easy to

take and sell l Financial statement fraud

l To make the company look good or make a problem go away

l Critical audit matters (CAMs) l A need to report considerations

related to audit procedures driven by the pandemic

l Inventory and fixed asset observation challenges l Critical to observe on or around the

balance sheet date l Challenges on the audit approach l Needs to be highlighted as a CAM

l Participant response based on personal/organizational experience

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s Suggested Answers to Discussion Questions 2. COVID-19: Are Your Financial Statements Infected? – Part II

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3. What are some impairment considerations for other nonfinancial assets? l Asset grouping

l Fixed assets, intangibles, and others

l Customer acquisition costs l The lowest level of identifiable

cash flows for a particular asset grouping

l Forecasting the cash flows of those asset groups

l Consistency of forecasting l Make clear what the assumptions

are and what the need for having different paths is

l Requires close coordination between accounting and finance personnel l Ensure all scenarios are

incorporated l Apply probability thresholds to

each one l Provide appropriate fair value of

a given asset

4. What loan modification considerations have resulted from the pandemic? l Considerations prior to loan

modification l Impact on incurred losses that

results from changes in credit risk related to borrowers for which modifications may occur

l CARES Act gives financial institutions temporary relief from the TDR accounting and disclosure requirements for certain loan modifications that are made in response to the COVID-19 pandemic

l Various federal and state agencies issued a statement which provides that short-term loan modifications made in good faith are not TDRs

5. What impact does CECL (current expected credit losses) have on the assessment of impairment of financial assets? What challenges has your organization faced when adopting CECL? l Under the CECL methodology an

entity should: l Report in net income (as a credit

loss expense) l The amount necessary to adjust

the allowance for credit losses l For financial assets over their

contractual term l Difference of economic conditions in

the forecast l The economic conditions in the

forecast at the beginning of the year were completely different than the current conditions

l It did not contemplate what was going to happen

l Entities have been able to pivot and adapt by changing the scenario they had built into their original projections l Push to a more adverse scenario

l Accountants will need to figure out what the real forecast is going to be

l Need to embed the real forecast into their estimates for loan losses over the lifetime of their portfolio

l Participant response based on personal/organizational experience

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sSuggested Answers to Discussion Questions (continued)

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6. What disclosures should an organization include on the current and future effects of COVID-19 and what struggles are companies facing with respect to going concern? How do your organization’s disclosures enable an investor to understand how management is analyzing the impact of COVID-19 on the company’s operations and financial condition? l Going concern under Subtopic

205-40 l Negative financial trends l Other indications of possible

financial difficulties l Subsequent events under Topic 855 l Risk and uncertainties under Topic

275 l Unusual items under Subtopic 220-

20 l Additional disclosure requirements

for filers under CF Disclosure Guidance Topic 9A

l Going concern struggles l Cash position l Consistent projections

l Look at the next 12 months l Forming a conclusion regarding

going concern l Determine if a plan is needed l Make sure accounting personnel

and the company are highlighting the conclusion and plan

l Coordinate the conclusion and plan with the auditor

l Participant response based on personal/organizational experience

7. What are some other reporting considerations in light of the COVID-19 pandemic? What other reporting considerations will your organization include in its financial statements? l Executive compensation

l Timing of stock grants l Volatile economy and unclear

performance conditions

- Subsequent events l Separating recognition of a

subsequent event l What are the facts and

circumstances that drove the event

l Did it exist at the balance sheet date

l Non-GAAP measures l Being precise in how the impact of

COVID-19 is addressed in a non-GAAP measure l Should be done in a way that is

not misleading l Participant response based on

personal/organizational experience

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1. An opportunity to create fraud, especially during the pandemic is:

a) unintended consequences of sales targets

b) debt compliance

c) intentional restructuring to avoid impairments

d) loss of customers

2. It is critical to observe inventory:

a) at the time its value is highest

b) on or around the balance sheet date

c) within the last quarter of the year

d) on a weekend or holiday

3. Which of the following is an impairment consideration of other nonfinancial assets?

a) asset grouping

b) forecasting net realizable value

c) cash balancing

d) assessing risk

4. Loans are being modified as a result of COVID-19. Which modification would likely be considered a troubled debt restructuring?

a) a borrower is allowed to defer payments for three months

b) the lender has waived its fees for six months

c) payment terms have been extended five months for a borrower

d) the lender reduced the interest rate and extended payment terms for 5 years

5. Struggles companies face with respect to going concern include looking at:

a) current cash position

b) the quarterly cycle

c) the next 12 months

d) years ahead

6. A challenge with subsequent events is:

a) separating recognition

b) whether an event occurred

c) determining the rules

d) creating scenarios

7. Impairment tests on depreciated assets should occur:

a) at every year-end

b) ideally around the same time every year

c) if the replacement cost is less than the original cost

d) when a triggering event suggests that assets may be impaired

8. Non-recurring fair value disclosures include:

a) information about any transfers between Level 1 and Level 2 of the fair value hierarchy

b) fair value measurement changes during the period and the reasons for the changes, such as impairment

c) the Level 3 rollforward of the opening balances to the closing balance for Level 3measurements

d) a narrative description of the sensitivity of Level 3 fair value measurements to changes in unobservable input

You may want to use these objective questions to test knowledge and/or to generate further discussion; these questions are only for group live purposes. Most of these questions are based on the video segment, a few may be based on the reading for self-study that starts on page 2–13.

Objective Questions

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9. Which of the following is true regarding testing goodwill for impairment?

a) a qualitative test is required to be performed before the quantitative test

b) a triggering event must occur before a goodwill impairment test is required

c) one of the key factors in performing the test is identifying the reporting unit to which goodwill relates

d) all assets other than goodwill that may need a write-down for impairment should be tested after the goodwill impairment test

10. Goodwill is tested for impairment:

a) annually, at a consistent point in the fiscal year

b) at least annually, at any time during the year

c) only when a triggering event occurs

d) when a business is acquired

Objective Questions (continued)

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Self-Study Option

Reading (Optional for Group Study)FAIR VALUE FUNDAMENTALS – ASSET IMPAIRMENTS AND BUSINESS COMBINATIONS (FVFA4)

Accounting Continuing Education Kaplan – Mark D. Mishler, MBA, CPA, CMA

Fair Value (ASC Topic 820) and Impairments (ASC Topics 350 and 360)

LEARNING OBJECTIVES

At the conclusion of this section, participants will be able to understand:

l How GAAP fair value guidance applies to asset impairment for ASC Topic 350 – Intangibles

l How GAAP fair value guidance applies to asset impairment for ASC Topic 360 – Property, Plant, and Equipment

INTRODUCTION Fair value applies to nonfinancial assets when they are impaired. In these cases, fair value measurement is nonrecurring, being applied only at the impairment date.

The approach used for asset impairments in ASC Topic 350 – Intangibles, and ASC Topic 360 – Property, depends on whether

or not the assets are depreciated or amortized.

l Perform impairment tests on depreciated (or amortized) assets that are held and used only upon the occurrence of triggering events that suggest the assets may be impaired. When performed, the tests are “cash-flow based” because impairment exists when carrying values exceed undiscounted cash flows expected from those assets during their remaining economic life.

This approach is appropriate for both fixed assets and definite-lived intangibles. It makes sense that impairment is addressed only when there are adverse events because these assets’ carrying values already decline as they are depreciated or amortized.

l Goodwill and indefinite-lived intangibles are not amortized, so their original cost remains on the balance sheet indefinitely. As a result, value impairment is of greater concern over time, and ASC Topic 350 requires that impairment possibility be addressed at least annually (more often if there are triggering events).

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l In order to ensure adherence to

NASBA guidelines regarding self-study, the CPA Report and CPA Report Government/Not-for-Profit Self-Study Professional Education Centers are no longer available. Customers should contact their company administrators for information on taking course exams and receiving CPE credit for the courses.

l Customers may contact Kaplan Financial Education at cpesupport@kaplan.com to obtain certificates previously earned through the CPA Report Self-Study and CPA Report Government/Not-for-Profit Self-Study Professional Education Centers.

l Customers interested in the self-study format of the CPA Report can find information on Kaplan Financial Education's self-study libraries at Online Accounting CPE Courses.

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l A simplified alternative approach for goodwill is now available to nonpublic entities since the issuance of ASU 2014-02. This alternative results in goodwill being amortized and tested for impairment only when there are triggering events. This ASU is discussed in detail in this section.

Property, plant, and equipment classified as held-for-sale is a special case. When these assets become classified as held for sale, an impairment loss is required if their carrying values exceed expected net proceeds from the sale (“fair value less costs to sell”). These write-downs are the only ones that may not be permanent; recovery in value is allowed to be recorded. The common thread here is that impaired long-term assets are carried at fair value. The discussion below covers the following topics: Testing goodwill for impairment, including the PCC alternative in ASU 2014-02, and a new simplified impairment test in ASU 2017-04 Testing other indefinite-lived intangibles for impairment Impairments of other long-term assets – property and amortized intangibles Some of the most common applications of nonrecurring fair values include:

Assets – Certain nonfinancial assets are carried at cost unless, as a result of impairment, they must be written down to fair value. Generally, the write-down is permanent, and the fair value is treated as the “new” cost basis going forward (i.e., not repeatedly marked to market) – unless the asset becomes even further impaired. For assets used in the business, such as property and equipment, possible impairment is not monitored continuously; rather, certain events and circumstances will trigger an impairment test. This approach is also used for intangible assets with definite lives, i.e., those that are amortized. Assets held for sale are carried at the lower of cost or fair value less costs to sell. Any write-down will occur upon classification as “held for sale.” This classification is intentionally restrictive, as it is prone to abuse because depreciation is not recorded on assets held for sale. Often, assets held for sale are related to either a discontinued operation or a business combination where the buyer intends to immediately sell off some of the acquired assets. Intangible assets with indefinite lives – most notably (but not limited to) goodwill

– are required to be monitored continuously for possible impairment. Practically speaking, these assets are of greater concern because they remain on the books indefinitely.

Liabilities – Certain liabilities are required to be recorded initially at fair value. The most common examples are probably guarantees and asset retirement obligations. Fair values for liabilities such as these are generally based on an estimate of future cash flows (Level 3) due to the absence of any market for them.

Business Combinations – All assets and liabilities acquired must be initially measured at fair value. This is perhaps the most comprehensive application of nonrecurring fair values because many assets and liabilities recorded in business combinations relate to items not reported on the acquiree’s balance sheet. In subsequent periods, amounts recorded are not marked to market unless the nature of the account is subject to recurring fair value rules.

Some Useful Generalities

l Nonrecurring fair values tend to be the most challenging to measure because the assets and liabilities involved are not traded in an active market. Usually, appraisals, cash flow projections, and similar subjective techniques must be used.

l Nonrecurring fair values are handled separately from recurring fair values in ASC Topic 820 disclosure rules. However, because these fair value measurements result from other events such as impairment, discontinued operations, or a business acquisition, there are many more required disclosures beyond those for fair value. Care is needed to ensure that all necessary disclosures are provided.

l Assets that must be measured at fair value if they are impaired must first undergo an impairment test; the test may conclude that the assets are not impaired and should remain at their previous values—making their fair values irrelevant.

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l As mentioned earlier, there is no general requirement to report property, notes payable, and other nonfinancial assets and liabilities at fair value. ASC Topic 820 prescribes how to determine fair value without widening its scope.

Non-Recurring Fair Value Disclosures

The reporting entity must disclose information that enables users of the financial statements to assess the valuation techniques and the inputs used to develop these measurements. For assets and liabilities that are measured at fair value on a nonrecurring basis, annual and interim disclosures must include for each major class of assets and liabilities the following information on the inputs used to develop the values after initial recognition:

1. Fair value measurement changes during the period and the reasons for the changes, such as impairment. Nonrecurring fair value measurements are those that other Topics require or permit in the balance sheet in particular circumstances. Examples are asset impairment and measuring a long lived asset or disposal group classified as held-for-sale at fair value less costs to sell in accordance with ASC Topic 360 because the asset’s fair value less costs to sell is lower than its carrying amount. In such situations, fair value measurement is required by other Topics. For nonrecurring fair value measurements at a date that is not the end of the reporting period, a reporting entity discloses this fact as well as the intra-period measurement date. An example is a calendar year-end public company is reporting its Form 10-Q for the second quarter and had taken an impairment charge on a long-lived asset during the first quarter. The level in the hierarchy is applicable to each nonrecurring fair value measurement.

2. For fair value measurements in Levels 2 and 3, a description of the valuation techniques and inputs used. If there has been a change in either, disclose the change along with reasons why. Examples are changing from matrix pricing to the binomial model or using an additional valuation technique. Note that GAAP permits some exceptions when quantitative information about inputs would cause

proprietary information to be disclosed by a nonpublic entity. For example, if a private company records a goodwill impairment based on a business valuation, it would be exempt from disclosing proprietary information used as inputs in the valuation.

3. For Level 3 measurements, a description of the inputs and the information used to develop the significant unobservable inputs.

4. For fair value measurements using significant unobservable inputs (Level 3), a description of the valuation processes used. An example is how a reporting entity decides its valuation policies and procedures and analyzes changes in fair value measurements from period to period.

5. If the highest and best use of a nonfinancial asset differs from its current use, disclose this fact and the reasons why.

The following disclosure requirements do not apply to nonrecurring fair value measurements:

l Information about any transfers between Level 1 and Level 2 of the fair value hierarchy

l The Level 3 rollforward of the opening balances to the closing balances for Level 3 measurements

l A narrative description of the sensitivity of Level 3 fair value measurements to changes in unobservable input

TESTING GOODWILL FOR IMPAIRMENT

Background and Overview The material that follows covers:

The original 2-step impairment test The simplified 1-step impairment test in ASU 2017-04 ASU 2011-08, which introduced the option of performing a qualitative analysis up front, possibly removing the need for the 2-step test ASU 2014-02, which simplifies goodwill accounting for nonpublic entities by treating it as an amortizable intangible asset

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The Original 2-Step Test

The traditional 2-step quantitative test for impairment of goodwill is:

l Step 1: Compare the fair value of the reporting unit to its carrying value (including goodwill). If the fair value is greater, goodwill is not impaired. If the carrying value is greater, go to Step 2.

l Step 2: Determine the implied value of goodwill by comparing the fair value of the reporting unit to the fair value of its assets and liabilities without goodwill. Any excess of the carrying value of goodwill over the implied value of goodwill is the amount of impairment. This step equates to calculating the amount of goodwill that would be recorded if the reporting unit were purchased now.

This test is required to be performed annually, at a consistent point in the fiscal

year. If adverse events and circumstances arise, the test may have to be performed at other dates as well. (An illustrative list of adverse events and circumstances to consider are included in ASU 2011-08.)

The key factors in performing this test are (a) identifying the reporting unit to which the goodwill relates, and (b) knowing the value of the reporting unit, which usually necessitates having a business valuation performed. Further, if Step 2 is performed,

the valuation must also provide the fair values of all the identifiable assets and liabilities without goodwill. (The latter really goes beyond a typical business valuation.)

Further, because most private companies record the accounts of an acquiree on its own books, the ability to identify the acquiree as a separate entity in subsequent periods is lost. As a result, the reporting unit concept is, by necessity, applied to the company as a whole.

All assets other than goodwill that may need a write-down for impairment should be “tested” first. This causes the goodwill impairment loss to be less likely because the carrying value of the reporting unit is lower.

The following example illustrates the mechanics of the 2-step test.

Election to Perform a Qualitative Analysis

ASU 2011-08 was issued primarily to address concerns of private entities over the cost and complexity of applying the impairment test described above. The intended result was to simplify goodwill impairment testing by allowing entities to first evaluate qualitative events and circumstances to conclude whether it is more likely than not (“MLTN”) the

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reporting unit’s carrying value exceeds its fair value.

If this qualitative assessment results in a conclusion that it is not MLTN, the two-step impairment test based on quantitative data is not required. This approach is an option rather than a requirement and may be used in some periods but not others. An entity can always choose to go directly to the two-step test, and thereby forego performing this qualitative analysis (which is now sometimes referred to as “Step 0” of the goodwill impairment test). Conversely, when the two-step test is employed, the qualitative analysis introduced in this ASU need not also be performed.

Although the objective is simplification, applying the provisions requires an extraordinary degree of subjective judgment in order to reach a conclusion that, in the end, is supportable, documented, defensible, and in many cases, auditable. The standard is actually a trade-off between quantitative analysis that is complex and expensive to apply and qualitative analysis that must be robust enough to 143 withstand scrutiny. Consequently, it is not the “silver bullet” many private companies were hoping for.

Rather than prescribe a methodology or “bright line” cutoffs for the qualitative analysis, it provides a list of potential adverse events and circumstances that should be considered to assess the likelihood that the carrying value of a reporting unit exceeds its fair value and then describes in general terms how they should be weighted in terms of their significance, combined with factual data from prior periods or any other relevant data, and examined in conjunction with positive or mitigating factors to form a MLTN conclusion.

In addition to the option of performing a qualitative analysis, there are several related issues:

l There is no change to how goodwill is assigned to reporting units, nor is there a change to the requirement to test goodwill more than annually if adverse “triggering” events and circumstances are present.

l There is a revised list of events and circumstances that might trigger an impairment test between annual testing dates.

The option of carrying forward prior year valuation data to perform the current year impairment assessment is removed.

l Level 3 fair value disclosure requirements are clarified in that they are not required for inputs used in the goodwill impairment analysis.

l The method originally only applied to goodwill; it does not apply to testing other intangibles for impairment. However, the FASB subsequently issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, which allows using a similar qualitative assessment when testing indefinite-lived intangible assets other than goodwill for impairment.

l Revised List of Events and Circumstances – The “linchpin” of this standard is a list of events and circumstances that are analyzed to decide if it is MLTN that the fair value of a reporting unit is less than its carrying amount. As stated in the ASU, the list is not intended to be all-inclusive, and an entity should consider both severity and mitigating factors in determining whether the full impairment test for goodwill is required.

The list consists of adverse factors that suggest a reporting unit’s value may be impaired:

l Macroeconomic factors – deterioration in general economic conditions, access to capital, or foreign exchange rates, or other changes in equity and credit markets

l Industry/market factors – increased competition, industry downturn, change in the market for a company’s products or services, decline in market-dependent multiples or metrics affecting valuation, adverse regulatory actions

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l Cost factors – increased costs for materials, labor, etc., that adversely affect profitability or cash flows

l Financial performance – negative or declining cash flows, declines in actual or projected revenue or earnings compared with actual and projected results for prior periods

l Entity-specific – changes in management or key personnel, strategy, or customer base; litigation; consideration of filing for bankruptcy

l Assets – actual or contemplated major disposals; significant asset classes tested for impairment due to triggering events, recognition of goodwill impairments in subsidiaries of the reporting unit

l Share price – sustained decrease in share price (on a standalone basis or in relation to comparable companies)

None of these factors alone is “definite proof” that Step 1 of the goodwill impairment test must be performed. Rather, a company considers each type of event and circumstance, evaluates its relevance and significance to the company, incorporates mitigating factors, and reaches an overall MLTN conclusion. Published materials addressing this process emphasize the need to document each component of the analysis and provide reliable supporting quantitative data.

This alternative did not prove popular with the private companies it was meant to help. Further, with the alternative now provided in ASU 2014-02, its use is likely to be rare. Therefore, detailed guidance on applying the events and circumstance approach as well as an illustrative template to document the analysis are included in an Appendix to this section.

TESTING INDEFINITE-LIVED INTANGIBLE ASSETS OTHER THAN GOODWILL FOR IMPAIRMENT Intangible assets other than goodwill that may be indefinite-lived include:

l Trademarks and trade names

l Licenses (granted for the use of property or a service)

l Distribution rights

Under ASC Section 350-30 (Intangibles – Goodwill and Other > General Intangibles Other than Goodwill), a reporting entity must test indefinite-lived intangible assets other than goodwill for impairment annually, as well as any time adverse events or circumstances indicate possible impairment. The quantitative impairment test of ASC Section 350-30 requires the entity to determine the fair value of each indefinite-lived intangible asset other than goodwill. This is actually a one-step test, where carrying values are compared to fair values. If fair value is less, the asset is written down to fair value.

ASU 2012-02 permits an election to first assess qualitative factors in order to determine whether it is more-likely-than-not (MLTN) the indefinite-lived intangible asset other than goodwill is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test.

Consequently, similar to the goodwill option discussed above, a reporting entity may elect to assess qualitative factors based on events or circumstances to conclude whether it is MLTN that the asset is impaired, or just perform the quantitative test comparing the asset’s fair value to its fair value without this qualitative assessment.

ASU 2012-02 has a list of relevant events and circumstances to be considered both individually and in the aggregate and including adverse, positive, and mitigating events and circumstances. They include:

l Cost factors

l Financial performance

l Legal, regulatory, contractual, political, business, or other factors (including asset-specific factors)

l Other relevant entity-specific events

l Macroeconomic conditions

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l Industry and market consideration

Note that the preceding examples are not all-inclusive. An entity using the qualitative approach must also consider the following to determine whether it is MLTN that an indefinite-lived intangible asset is impaired:

l If the entity has made a recent fair value calculation for the indefinite-lived intangible asset, the difference between that fair value and the carrying amount

l Whether there have been any changes to the carrying amount of the indefinite-lived intangible asset

TESTING OTHER ASSETS FOR IMPAIRMENT

Introduction The practice of recording long-lived assets at historical cost assumes their use will provide future benefits at least as great as their carrying values.

The concept of writing down an impaired asset to some value less than carrying value is not new. Over the years, large companies did record such write-downs for impaired assets, but ASC Topic 360, Property, Plant, and Equipment, provides authoritative guidance intended to ensure that the related measurement and reporting are consistent.

The guidance in ASC Topic 360 addresses two separate (but similar) major areas:

1. Assets held and used, although impaired

2. Assets held for sale, which may or may not be connected with discontinued operations

The impairment rules in ASC Section 360-10-35 generally apply to all entities, including not-forprofits, with specified exceptions that include:

l Specialize financial instruments, and certain intangibles of financial institutions

Note that the methodology in ASC Section 360-10-35 also applies to finite-lived (i.e., amortizable) intangible assets.

Definite-lived assets are reviewed for impairment only when certain triggering events occur that indicate their values are likely to be impaired. Consequently, any “test” for impairment is not a routine evaluation performed annually or at each balance sheet date, but one “triggered” by events such as:

l Significant decrease in the market value of an asset

l Significant change in the way an asset is to be used

l Significant changes in the business or legal environment

l Significant cost overruns incurred for self-constructed assets

l Continued (or anticipated) operating losses and/or cash flow deficiencies associated with identifiable assets

l A current expectation that it is MLTN the asset will be sold or otherwise disposed of before the end of its useful life.

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SURRAN: COVID-19 imposed certain pressures on C-suite executives and has created an environment that is ripe for fraudulent activity. Pressure is one of the three legs in the fraud triangle model that can lead someone to commit fraud, along with perceived opportunity and rationalization. It's easy to talk in general terms about pressure, opportunity and rationalization, but how does each one surface in day-to-day operations especially during the pandemic?

Pressure can be created by

l Unintended consequences of sales targets and/or incentives

l Loss of income that would entail financial hardships on a company; level loss of revenue may mean a company can't meet its obligations

l Debt compliance

l Salespeople losing customers even prior to COVID

l Companies accumulating unrealizable assets – this is the perfect time to expense them and clean-up the balance sheet

An opportunity can surface at times when

l Accounting records need to be fixed or "cleaned up"

l Aggressive estimates are made to prevent impairments and going concern disclosures

l Reporting units are intentionally restructured solely to prevent impairment

l Overdue impairment charges are taken

l Reporting units are engineered to trigger current period impairment to prevent drag of future impairment charges

Rationalization may be the easiest of all, especially during an economic downturn.

l "I can't afford to show a loss right now"

l "This is temporary, I will fix it after COVID"

l "My family comes first – without these aggressive actions I would be furloughed or terminated"

l "The market doesn't expect us to have a good quarter anyway"

l "What difference does it make if I put an expense in the wrong period right now?"

WILLIAMS: We continue our segment with Chris Brown, senior managing director at FTI Consulting, discussing the related pressures, incentives and opportunities to commit financial reporting fraud that should be considered in an entity's Risk Assessment from a corporate perspective.

BROWN: The pressures right now I think are unprecedented. Especially when you think about the C suite and those responsible for governance, including clear and transparent financial reporting. Meeting sales targets in this current environment, loss of income could result in immediate financial

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hardship, both for the entity and at a personal level. Maintaining debt covenants and trying to stay in compliance with agreements that were written that really didn't contemplate an environment like we have that's so widespread are another one, as well as market expectations and just trying to keep everyone employed.

So, thinking about what the C suite is thinking, it's trying to keep everyone employed, trying to do the best for your business but balance out the stakeholders and your shareholders because that's who you have a fiduciary responsibility to.

There are a number of opportunities in this environment to avoid issues, so you can go through and make aggressive estimates to show valuations that may be overstated. You could do intentional restructuring to reporting units solely to avoid impairments, and the SEC has seen that and hopefully that's not being contemplated, but that is certainly an opportunity. And then cleaning up prior accounting issues, we see this often when the C suite turns over.

The first thing the new guys do is they'll come in and they'll look through, and they'll have a different strategy and now you've got a bath being taken. Again, in this environment where you've got so much change those are opportunities and the risks that every entity should be considering.

And it can go the other way. You can get into a situation where you start to have ultra conservative estimates, so that basically you're trying to engineer some income down the road. You can take advantage of market opportunities to do that, but certainly you need to keep and maintain internal controls and have a consistent methodology that you approach and document the assumptions that you're taking when you have a business that takes a turn.

BROWN: From a risk assessment perspective, I think it's really critical for the C suite to think about the culture, and to think about the tone that they're setting because it's a natural environment where employees from top to bottom are under stress.

So, even if they're not being directed, there could be people in middle management that just, hey, I can help my company if I just take my estimate and make it a little more aggressive here. I think I can support it. You really want to make sure that the tone at the top is directing people to do the right thing, follow the ethical standards of the entity, and that tone needs to be demonstrated and emulated probably in this environment, just I would say screaming from the mountain tops, really needs to be clear to everyone.

WILLIAMS: Risk assessment is considered the foundation of an audit. It is the way auditors obtain an understanding of the company and its environment to identify and assess the risks of material misstatement of the financial statements and plan the audit procedures to be performed accordingly. Chris continues by giving us his insights from the auditors' perspective.

BROWN: From the auditor perspective, there's some unique challenges that are happening right now. I read a Wall Street Journal article a few days ago that talked about the challenges the audit firms are having of doing physical inventories. So, you can imagine if the auditors are trying to figure out how to do that, and then deal with the remote environment, and then compounding that with the companies facing the same challenges, you have a lot of risk for things being moved around, or hidden, or what have you. From an auditor's perspective I think it's narrower because

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t they're going to be focused on risk assessments from a financial reporting perspective.

And I think you'd have kind of the same ones that we'd always think of, just maybe on steroids. Like valuation risk, impairment risk, and then of course the big question as always is timing. Why now, why not before, why not in the future?

From a management perspective, the risk assessment needs to be broader than financial reporting, it needs to include operational and regulatory risks that are all exacerbated in this environment. So it's tough because there's more distractions than ever, but taking your eye off the ball of this particular topic can really be troublesome and damage a company.

WILLIAMS: Todd Rahn, senior managing director and lead of accounting advisory practice on the west coast, from FTI Consulting gives us his perspective.

RAHN: I do think about the fraud triangle, and in particular related to the incentive, which Chris touched on there. Both related to frankly protecting assets, but also financial reporting fraud. I've seen recent statistics that upwards of 50% of people in this country right now, in the US, don't have sufficient access to food. These are massive incentives, massive issues that are hitting everybody that's working at any company right now in this country.

The important thing is that again, like Chris said, like shouting from the rooftops what the culture is all about, that is critical. And also making sure that the back part of that process is Graphic 207 really closely focused on and spending a lot of time, frankly, analyzing things related to shrink, theft, any particular IP. For example, if there's computer technology that we all know that is frankly, has huge amounts of value in the current environment, are there any aspects of intellectual property residing at companies that might be easy for someone to take and sell in any way, shape, or form. These considerations are being more and more focused, and frankly, problem areas for companies. Not to mention the fact that yes, in addition to that, the incentive for financial reporting fraud because someone wants to make themselves look good, or just make a problem go away are clearly big issues.

WILLIAMS: A new requirement for auditors is to report on Critical Audit Matters, known as CAMs. In 2019, PCAOB selected 12 audits of large accelerated filers with fiscal years ending on or after June 30, 2019, to specifically review how auditors of these filers implemented the CAM requirements. The second effective date, which impacts audits of all other companies to which the CAM requirements apply, is for audits of fiscal years ending on or after December 15, 2020. Under PCAOB AS 3101, auditors are required to identify material accounts that involve "challenging, subjective, or complex auditor judgment" within their audit report and explain why they consider the matter to be a CAM and how it was addressed during the audit.

RAHN: One other thought too is that we all know that critical audit matters are now getting reported for public companies and audit opinions. And exactly this kind of issue will certainly create more focus on the need to capture, report, along with obviously working with management and audit committees, considerations related to procedures that the auditor has to do that are driven by the pandemic. So, inventory is a great example, but there's other things. They're related to fixed asset observations.

I mean, inventory's so critical because the need to be there on the balance sheet date, at or around the balance sheet date, but there's lots of other

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areas too where you think about the impact of the pandemic, the challenges there, and the risks that relate to the audit approach and to the auditor themselves. It's a great thought that those critical audit matters are going to have to be highlighted and considered, and actually, the PCAOB I'm sure, as well as the SEC are very focused on how companies are going about addressing that, audit committee oversight, and naturally of course from an independent audit perspective how the independent auditor forms their view related to what critical audit matters are and how those get described and reported.

WILLIAMS: Todd gives us his views on impairment categories he thinks raise the most significant litigation exposure.

RAHN: It depends on the industry. We talked about some of the ones that are really most at risk here, GIG economy, obviously brick and mortar companies, some in the financial sector. Each one of these are going through extensive assessments of impairments. And not to mention, by the way, going through that having to deal with the underlying issue, of how dramatically overnight the forecasted cash flows for these companies has shifted. And that really to me is one of the key points be it six months ago, had these really optimistic projections, putting even the impairment considerations aside, and overnight those have completely evaporated, that is going to create a situation where there's just a lot of potential for litigation.

Because the investors obviously put their money in assuming that that was going to continue, and it didn't.

Now, there are exceptions of course where there's just nothing that a company could've done about it, but when they're being very aggressive with those projections in the beginning and then you couple on top of it a difficult situation, that's clearly where the stress is going to come out.

So again, it gets back to what can companies do to prevent that, it's being as brutally honest as possible with disclosure. Great lines of communication with your investor base, being very open about what's going on within the company, and having a good dialogue about that. And what management is doing to pivot and create value in the current situation.

WILLIAMS: When in doubt, the SEC can help. The SEC has been very responsive and a great resource to companies with any questions that have risen due to the pandemic on various accounting treatments.

RAHN: The SEC for years has been very open to companies coming to them, but certainly lately they're doing everything they can to make sure that they provide resources to evaluate pre-clear issues, have an open level of discussion with registrants to make sure that they're doing their part.

As I mentioned, an interesting dynamic of what's going on is that you're seeing just what companies are doing well and what companies aren't, and then you think about the impact that's having on the IPO market.

We've had a lot of companies that are going into that IPO pipeline, that means there's capital that's going into public markets as opposed to as we know for years there's been so much concentration of money in venture capital and private equity. That's not going to go away, that continues to be a huge channel for growth and continues to be an area of focus. But that said, if you think of all these companies going public, that means the SEC is going to be taking more of an active role and already is, in

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t ensuring that there's appropriate disclosure, and they obviously want to keep an open line of communication with the investor base, with companies, in order to have enough support from them on how to interpret what's going on, and what reporting roles are applicable.

WILLIAMS: Todd discusses impairment considerations for other nonfinancial assets.

RAHN: In the course of this conversation we've touched on most of those. I would say it goes back to one thing I just mentioned which relates to forecasting. If you think about nonfinancial assets, underpinning those are a couple things. And so we talked about reporting units in the context of goodwill.

For other nonfinancial assets, it's all about asset grouping. And it's about fixed assets, and intangibles, and others. Or it could be anything, it could be customer acquisition costs, anything that's really sitting on the left-hand side of the balance sheet, is what is the appropriate asset group, meaning the lowest level of identifiable cash flows for a particular asset grouping, which is a pretty low threshold.

And ensuring that they're grouped correctly, and then that the company is dealing with those challenges, which I'm sure we're going to get to, related to forecasting those cash flows, which almost feels like it's nearly impossible in the current situation.

So, what does that mean? Well, it means that there has to be very close coordination between the accounting and finance personnel,

Or other areas within the business that are looking at different scenarios, that okay, if X, Y, Z happens that means we have to do A, B, C, and so on. That is incorporated into scenarios, applying probability thresholds to each one of those scenarios in order to ultimately provide the appropriate answer around a fair value of a given asset.

WILLIAMS: Chris adds one more area for consideration.

BROWN: In addition to what Todd said, I think it'd be important to point out the consistency of forecasting within an entity. So often in my days as an audit partner, when I'd look at forecasts, there'd be three or four different forecasts depending on what the use of it was. There'd be one looking at deferred tax asset realization, then a different one for operational purposes, and then maybe another one for goodwill.

That's always something that gets heavily scrutinized. So, you want to make sure that the forecasting is consistent across the entity. And then to the extent there's deviations where you're trying to forecast maybe more adverse conditions or less adverse conditions, it's very clear what the assumptions are, and what the need for having those different paths is.

SURRAN: Creditors that lend to entities that may be adversely affected by economic instability resulting from the pandemic will need to assess whether certain events (such as downgrades in borrower credit ratings or declines in cash flows and liquidity) indicate that an impairment evaluation is required. The economic uncertainty could also result in loan modifications that must be accounted for as a troubled debt restructuring (TDR) in accordance with ASC 310-40. For entities that have not yet adopted ASC 326, a modification is not accounted for as a TDR before the date the modification has occurred (i.e., a legally binding agreement is in place).

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t Nevertheless, even before the occurrence of such a modification, entities should consider the impact on incurred losses that results from changes in credit risk related to borrowers for which modifications may occur.

Section 4013 of the CARES Act gives financial institutions temporary relief from the TDR accounting and disclosure requirements in ASC 310-40 for certain loan modifications that are made in response to the COVID-19 pandemic.

In addition, on March 22, 2020, various federal and state agencies ("the agencies") issued an "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus" ("the statement").

The statement provides the agencies' views on whether loans restructured under creditors in response to COVID-19 are troubled debt restructurings ("TDRs") under ASC 310-40, Receivables – Troubled Debt Restructuring by Creditors.

According to the statement,

"the agencies have confirmed with staff of the Financial Accounting Standards Board (FASB) that short-term modifications made on a good faith basis in response to Covid-19 to borrowers who were current prior to any relief, are not TDRs.

This includes short-term (i.e. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant."

Under current expected credit losses (CECL) methodology, when it comes to loans, an entity should report in net income (as a credit loss expense) the amount necessary to adjust the allowance for credit losses for management's current estimate of expected credit losses for financial assets over their contractual term.

WILLIAMS: Chris Brown discusses the impact of CECL when it comes to assessment of impairment of financial assets.

BROWN: Well, for those that have adopted CECL, it requires an estimate of lifetime losses. It has all the risks inherent in normal valuations because you have forecasting elements there. And then it has additional ones because the standard allows you to revert back to historical, as the forecast period goes on, you could have financial assets that could have lives up to like 30 years, for example. You have a number of assumptions and significant inputs that are even incremental to a normal complex valuation that would be used in something like goodwill.

I think one of the big challenges for CECL is going to be when everyone adopts at the beginning of this year, those that had to, the economic conditions in the forecast were completely different. It didn't contemplate what was going to happen. I think entities have been able to pivot and adapt to that by changing kind of the scenario that they had built into their original projections to push to a more adverse scenario. But ultimately there's going to be a lot of tension around having to go back and re-forecast and making sure, as I mentioned before, that your forecasts within the entity are consistent with what you're doing with CECL. So, I would expect a ton of work. The accountants are not going to get a lot of sleep at the end of this year, as they go back and try to figure out what the real forecast is going to be and embed that into their estimates for loan losses over the lifetime of their portfolio.

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t SURRAN: Under U.S. GAAP, financial statements are to include adequate disclosures on the current and potential future effects of COVID-19. This includes disclosures on going concern assumptions under Subtopic 205-40 and subsequent events under Topic 855, as well as risks and uncertainties under Topic 275 and unusual items under Subtopic 220-20. There are additional disclosures required for filers under CF Disclosure Guidance Topic 9A, issued by the SEC in late June 2020.

These disclosures should enable an investor to understand how management and the board of directors are analyzing the current and expected impact of COVID-19 on the company's operations and financial condition, including liquidity and capital structure.

ASU 2014-15, Going Concern, codified as ASC 205-40, provides guidance for determining when and how to disclose going concern uncertainties in the financial statements. An entity is required to disclose its inability to continue as a going concern when there is "substantial doubt," which the standard defines as follows:

"Substantial doubt about an entity's ability to continue as a going concern exists when conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). The term probable is used consistently with its use in Topic 450 on contingencies."

Entities are required to evaluate "relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued."

The standard provides two examples of events that suggest an entity may be unable to meet its obligations:

(a) "Negative financial trends, for example, recurring operating losses, working capital deficiencies, negative cash flows from operating activities, and other adverse key financial ratios

(b) Other indications of possible financial difficulties, for example, default on loans or similar agreements, arrearages in dividends, denial of usual trade credit from suppliers, a need to restructure debt to avoid default, noncompliance with statutory capital requirements, and a need to seek new sources or methods of financing or to dispose of substantial assets."

WILLIAMS: In addition to financial and non-financial asset impairment, Todd gives us his thoughts on other reporting considerations that should be looked at and evaluated by management and C-suite executives.

RAHN: Well, as we've touched on, it's been an unprecedented year, unprecedented period with a humanitarian crisis like we've never seen and that's impacting companies, frankly, in every single way. So, in addition to impairments, the things that we're seeing that are getting more focus than other areas right now that really haven't in the past are going concern, restructuring debt modification, anything related to that, troubled debt restructuring, or just modifications, et cetera. Then also just, M&A, activity, just dealing with acquisitions, sales, that sort of thing. But I want to draw out one in particular that is good for companies to note.

Frankly, some companies may not even be very conscious about this, which is the going concern analysis. So, for decades, as we know, going concern was the purview of the auditor.

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t It was the classic tail wagging the dog where management's kind of rolling along and the auditor just walks into their office one day and says, "Hey, I don't think you're going to make it the next 12 months." I mean, obviously it's not like that, but it was not something that the company had to deal with in its own internal control environment.

Well, that's now changed as of a few years ago where the FASB's incorporated in the U.S. GAAP, a requirement that companies must assess its own going concern and come up to that conclusion. Now, the rule is generally similar to what the auditor does, but there are differences.

But the more important thing is that the companies know that, "Okay, I'm not doing so hot and I've always had plenty of cash. I need to form my own conclusion about what that going concern answer is and document it and make sure that it's ready to be audited."

The key there, under that standard, is even if management concludes that they have sufficient capital for the next 12 months, sometimes the reason they conclude that is because there's plans that mitigate something that's creating an initial substantial doubt in the first place. And if you're in that bucket where you think you're going to make it, but you have some plans that you're putting in place or are put in place that are addressing that original going concern, then management has to make that disclosure within its financial statements and obviously something that we're going to see an increase in the months ahead.

WILLIAMS: But what are the areas that companies mostly struggle with when it comes to going concern?

RAHN: Where I've seen companies struggle the most with the going concern is exactly that issue that Chris mentioned of the projections, because companies don't think in 12-month increments. And frankly, even though accountants get all excited about the financial reporting date and the year-end date, that's not something really that company is thinking about on a regular basis.

They're thinking about if they're public, obviously the quarterly cycle, but then they're also thinking longer term for years ahead and so, this is a very specific accounting question that gets into the next 12 months, the cash position of the company. Now, clearly, if this is a question in the first place, no doubt it's top of mind for the CFO to be thinking about, "Okay, what's my cash position?"

But they're not saying, "Oh gosh, I think I'm going to make it 11 and a half months." They're just thinking about, "Okay, I know I need cash. Here's the financing I got to get put in place."

Then when it comes to this evaluation and obviously things are tense anyway, if you're having this conversation and you've got a standard in the accounting rules that requires them to look at that 12 months, come up with the projections, as Chris said, make them consistent with everything else that you're talking about in your business, and then forming that conclusion and distinguishing whether you need plans, it becomes a lot more complicated than it actually might originally appear.

And so, the key is making sure that the accounting personnel and the company are highlighting that early enough, so that it can be a well thought out conversation. And then yes, it does need to be coordinated with the auditor, although it's rare if ever that there's a disagreement between the accountant and the auditor on the going concern conclusion.

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t WILLIAMS: Chris continues with his thoughts on reporting considerations, other than financial and non-financial asset impairment.

BROWN: Well, aside from the elephant in the room of impairment and going concern, a few others I would touch on, first would be executive compensation, so the timing of stock grants and a volatile economy and the stock market is jumping up and down, could certainly be questioned and so, we are looking at unclear performance conditions, modifications, et cetera.

Another would be subsequent events. So, there are a lot of challenges here now, separating recognition of a subsequent event. And looking, what are the facts and circumstances that drove, whatever that event was, did they exist at the balance sheet date?

It sounds easy when you read the rules, but there are some number of scenarios that we see or we deal with that are really not so clear. With the impact of something like COVID, I think that even is more challenging.

Then finally, maybe what I'd mention is non-GAAP measures and then being precise in how do you assess the impact of COVID in a non-GAAP measure?

I think there would be a natural inclination to say, but for COVID we would have done X and carving that out and how you do that in a way that's not going to be misleading or challenged is very intricate and complex and you really need to be thoughtful if that's a path that you're going to go down.

WILLIAMS: And yes, executive compensation and payments made to upper management, when a company is on the verge of bankruptcy, have certainly made the news. Some will ask why executives should be rewarded for bringing their company into bankruptcy? So, how are those amounts justified?

BROWN: I think it's a really difficult challenge. If you have an entity that's in trouble and you're a board, and you're trying to find the right executives to come in and turn the company around, to get the level of talent you need, people are not going to step in with that level of talent without a compensation package that's going to reward them for the stress and the effort and the time away from their family to make the turnaround happen.

The other edge of the sword is if it doesn't work out and it's not successful, like we've seen in some of the bankruptcies, now the compensation gets questioned and that's a very difficult thing to deal with on the back end because the optics of it are not great. So, that's something that boards need to think about and frankly, the C suite management also needs to consider to try to strike a balance so that everyone understands kind of the nature and why the compensation is what it is and hopefully kind of maybe mitigate some of that scrutiny.

WILLIAMS: We end our segment with Todd Rahn's and Chris Brown's final thoughts.

RAHN: I would say we've covered a lot of ground on impairments, early warnings, restructuring, step modifications, CECL, accounting standard adoption. Stepping back from this for a minute, I think the key right here is communication. The key is communication and that companies need to be, even though it's so easy for all of us, we're sitting in our houses, the good portion of the day, and we're just not interacting with each other as

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t much anymore. It's so easy to not do that, not communicate and just kind of assume that everything's going okay.

It's just that where issues arise with advanced reporting is surprises and so, making sure be it related to executive comp packages and metrics there, whether it's related to leasing and making sure that you're reporting those correctly, making sure that those impairments, you're giving enough of an early warning and talking about a situation. Going concern, communication with your auditor.

I mean, on and on is putting an emphasis of making sure that disclosures are robust, that it's a blank slate for public companies in particular, is that in your filings, that you're being very open, you're rewriting the handbook, you're rewriting what you have in your disclosures and being very clear about what's going on in the business, that will pay off tenfold in the future.

And obviously with your own people, with your employees, making sure that you're being very clear with them and on the mission of the businesses, staying focused on your people and making sure that they're staying healthy and that they're focusing on their own wellbeing, but also focusing on their jobs and ensuring that they're doing what they need to be doing for the purposes of maintaining good internal controls over financial reporting.

BROWN: Two points that I would leave everyone with. First there's no doubt this environment is as challenging as we've faced in a long time and the pressures on management are always high and now they're exponentially greater and I think it's really important for them to not take the eye off the ball relative to culture and setting the right tone from the top to the bottom to the newest intern is really critical to make sure that these pressures don't somehow invade their way into the financial reporting process and the internal control process.

Secondarily, I think it's really important for those that are having to do the work around these critical valuations, around impairments, around fair value, to document the assumptions and really get good documentation and support with the mindset of expecting that someone is going to come in later with 2020 hindsight as to what happened and they're going to challenge what you've done, so that thorough documentation can really be the difference between what I would say, a very simple review process or one that goes into litigation, regulatory enforcement and so on. So, those two things I think combined, if you keep those in mind are really going to help you get through this.

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Segment Three

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3. Deferral of Payroll Tax Obligations and More

Learning Objectives:

Segment Overview:

Field of Study:

Recommended Accreditation:

Running Time:

Video Transcript:

Course Level:

Course Prerequisites: Advance Preparation:

Expiration Date:

Taxes

December 12, 2021

Work experience in tax planning or tax compliance, or an introductory course in taxation.

None

1 hour group live 2 hours self-study online

Update

See page 3–19.

38 minutes

On August 8, 2020, the White House issued a “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster” allowing deferral of the withholding, deposit, and payment of the tax on wages or compensation paid during the period of September 1, 2020 through December 31, 2020. Barbara Weltman, president of Big Ideas for Small Business is giving us some of the highlights of the presidential deferral pronouncement, as well as the IRS developments on payroll-related matters.

Upon successful completion of this segment, you should be able to: l Identify the recent clarifications by the IRS on deferred

payroll taxes, l Recognize the different tax implications of debt forgiveness

or debt modification, l Recognize the IRS forms available for digital signature, and l Understand the differences between the proposed and final

regulations for the quid pro quo tax treatment of charitable contributions.

Reading (Optional for Group Study):

“IRS adds six more forms to list that can be signed digitally; 16 now available” https://www.irs.gov/newsroom/irs-adds-six-more-forms-to-list-that-can-be-signed-digitally-16-now-available

“Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster” https://www.whitehouse.gov/presidential-actions/memorandum-deferring-payroll-tax-obligations-light-ongoing-covid-19-disaster/

“Rollover Rules for Qualified Plan Loan Offset Amounts” https://www.federalregister.gov/documents/2020/08/20/2020-16564/rollover-rules-for-qualified-plan-loan-offset-amounts

See page 3–12.

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A. Deferring Payroll Tax Obligation – Two Conditions

i. Applicable to any wages or compensation less than $4,000

ii. No penalties, interest or additional amount added to the tax

B. Uptick in Position of Payroll Taxes

i. Payroll taxes often include l Tax credits l Deferral options for employers

& self-employed individuals l Additional deferral options

available

C. Deferred Applicable Taxes

i. Employee’s share of social security taxes based on l Wages – IRC section 3121(a) l Compensation – IRC 3231(e)

ii. Employers have to withhold starting January 1, 2021 l And pay on or before April 30,

2021

iii. Interest & penalties will start accruing May 1, 2021 l If payment is NOT made

D. Deferred Taxes & Terminated Employees

i. The company is on the hook for the deferred taxes of terminated employees

I. Payroll Tax Deferral – the Rules

A. Recent Clarifications by the IRS

i. On the difference between a deposit and a payment toward an employment tax liability

ii. How employers can defer their share of social security tax l Reduce required deposits or

payments l Up to the maximum of the

employer’s share of social security tax

l Reduction does not need to be applied evenly

B. Other Matters Under the FAQs

i. Interaction with the research payroll tax credit for small businesses and the work opportunity tax credit

ii. Explains how to determine earnings for the deferral period

C. Flipping the Coin

i. Payroll tax deferral may be a good thing but may create problems l Depending on your business type

D. Got a CP14 Notice? It May Be an Error

i. The IRS may not have factored in l Payroll tax deferral election l Use of payroll taxes to give paid

sick leave & paid family leave to employees

l Claiming tax credits

E. When to Use Existing 941X or Revised 941X

i. If adjusting a Q1 2020 or earlier form, use the existing 941X

ii. If adjusting Q2 or later and have no change to the employer’s share of social security tax l The IRS recommends waiting

for the new form

iii. If adjusting Q2 or later and have changes l Wait for the new revised Form

941X

iv. Don’t send a Form 941 with “amended” or similar notation written on it in an attempt to adjust any quarter

II. Payroll Tax Deferral – Implementation

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Outline (continued)

A. Exceptions to Ordinary Income

i. Extent of forgiveness of loans under the PPP

ii. Cancellation of qualified home mortgage debt in 2020 l Up to $2 million

iii. Debtor is bankrupt or insolvent

B. Facts Always Matter – Connell v. Commissioner

i. Stockbroker’s debt of over $3 million was cancelled l In exchange for his book of

business

ii. He treated it as capital gain

iii. Tax Court rejected his argument

iv. Appellate Court agreed with the Tax Court l No evidence of the underlying

reason for the transaction

C. VHS, Inc. v. Commissioner

i. Lack of debt repayment does not trigger bad debt deduction l In the absence of a bonafide

debtor/creditor relationship

D. Significant Modifications of Debt Instruments

ii. Are viewed as COD income

iii. Adjusted issue price exceeds the adjusted issue price of the original debt instrument

E. Newest SBA Development

i. Vision and dental benefits are payroll expenses

ii. Small loans less than $20,000 may be also forgiven

III. Cancellation of Debt and Loan Forgiveness

A. Disaster-Related Postponement

i. The IRS is required by law to pay interest calculated from the original April 15 filing deadline by the postponed deadline July 15 l As long as the taxpayer files a

2019 Federal income tax return by then

l Not applicable to businesses

B. 2020 Forms 1040 & 1040SR

i. Postcard return is not an option

ii. Form 1040 SR l Four pages long & includes

table with standard deduction amounts

iii. Forms 1040 & 1040SR l New lines for charitable

contribution deduction for non-itemizers

l Recovery rebate credit for those who received economic impact payments

l Estimated tax payments from Schedule 3

l Virtual currency holdings is now on page one

C. New Line on Schedule 3

i. Applicable for qualified sick and family leave credits for household employers & self-employed individuals

D. Payroll Tax Deferral & Self-Employed Individuals

i. Deferral is addressed on their income tax return

ii. Schedule SE no longer has a long and short form, instead l Part 1 – to figure tax l Part 2 – to figure optional tax

payments l Part 3 – to figure maximum

amount deferred

iii. Deferred amount is entered on Schedule 3 under “other tax payment”

E. Late Payment Penalties

i. Notices CP501, CP503 & CP504 will not be mailed

ii. Relief is provided from bad check penalties for dishonored checks received between March 1 and July 15

IV. New IRS Rules and Forms

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A. Eligible Partnerships That Can Opt Out

i. 100 or fewer partners l Individuals l C corporations l Foreign entities l That would be treated as C

Corporations if domestic l S corporations l Estates of deceased partners

B. Rev. Proc. 2020-23

i. Allows such partnerships to file amended returns to take advantage of retroactive changes in the CARES Act

V. Partnership Audit Issues

A. Six New Forms Added to the List

i. Form 706

ii. Form 706-NA

iii. Form 709

iv. Form 1120-ND

v. Form 3520

vi. Form 3520-A

B. Forms Initially Qualified for Digital Signatures

i. Form 3115

ii. Form 8832

iii. Form 8802

iv. Form 1066

v. Form 1120-RIC

vi. Form 1120-C

vii. Form 1120-REIT

viii. Form 1120-L

ix. Form 1120-PC

x. Form 8453, Form 8878 series and Form 8879 series

C. Tax Court Adjustments

i. Will accept electronically filed stipulated decisions bearing digital image signatures

ii. Revising practitioner’s guide to electronic case access and filing to reflect this adjustment

iii. Changes in submission of documentary evidence and procedures relating to subpoenas

iv. Administrative order 2020-03 updates to clarify limited entries of appearance l May be filed in cases that were

on canceled trial sessions

VI. IRS & Tax Court: COVID-19 Provisions

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Outline (continued)

A. Quid Pro Quo Charitable Contributions

i. Proposed Regulations l No charitable contribution

deduction is allowed l Safe harbor – SALT credits

received for the donation can be disregarded if they don’t exceed 15% of the taxpayer’s payment

ii. Final Regulations l Quid pro quo principle applies

whether the party doing it is the donee or a third party

l Safe harbor applies to payments of cash and not property

B. Treatment of Contributions for Businesses

i. Payments are deductible as ordinary and necessary business expenses l NOT treated as charitable

contributions

ii. The safe harbor does not apply for owners of these specified pass-throughs l If the credits reduce state and

local tax

“I suggest you go back to guidance issued last year in Rev. Proc. 2019-12, which contains a number of good examples of how this works.”

— Barbara Weltman

C. Are Contributions Excludable or Taxable?

i. Grants were a set percentage l 30% to 80% of state income tax

withholding on wages

ii. Tax Court – contributions are capital

iii. Third Circuit – held the grants taxable l There were no restrictions as to

the use of money

D. TCJA – IRC Section 118

i. Excludes from the definition of contributions to capital any contributions by a government entity

VII. Other Changes for Filings

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3. Deferral of Payroll Tax Obligations and More

l As the Discussion Leader, you should introduce this video segment with words similar to the following:

“In this segment, Barbara Weltman gives us some of the highlights of the presidential deferral pronouncement “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster,” as well as the IRS developments on payroll-related matters.”

l Show Segment 3. The transcript of this video starts on page 3–19 of this guide.

l After playing the video, use the questions provided or ones you have developed to generate discussion. The answers to our discussion questions are on pages 3–8 and 3–9. Additional objective questions are on pages 3–10 and 3–11.

l After the discussion, complete the evaluation form on page A–1.

1. What forms did the IRS add to the list of those being accepted with digital signatures and why did they make this decision?

2. What was included in the presidential memorandum and subsequent IRS guidance providing for the option of deferring the payment of certain payroll taxes? What did your organization or clients decide to do in this regard and why?

3. What was included in the IRS guidance on what the CARES Act provides for regarding the deferral of certain payroll taxes? What has been the experience, if

any, of your organization or clients with such provisions?

4. What was the IRS guidance for employers on how to handle corrections for employment taxes on Form 941?

5. What are the tax implications of debt forgiveness and debt modifications for a borrower?

Discussion Questions

You may want to assign these discussion questions to individual participants before viewing the video segment.

Instructions for Segment

Group Live Option

For additional information concerning CPE requirements, see page vi of this guide.

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6. What have been some changes in the PPP loan forgiveness rules and why are some tax advisors suggesting that borrowers wait to file a loan forgiveness application? What are your organizations and clients doing in this regard and why?

7. What are the IRS regulations regarding charitable contributions made by individuals and businesses in return for state and local tax credits?

Discussion Questions (continued)

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s1. What forms did the IRS add to the list of

those being accepted with digital signatures and why did they make this decision? l Form 706 and Form 706-A: U.S.

Estate Tax Return l Form 709: U.S. Gift Tax Return l Form 1120-ND: Nuclear

Decommissioning Funds l Form 3520 and Form 3520-A:

Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts

l Decision made to protect the health of taxpayers and tax professionals

l Reduces in-person contact allowing both groups to work remotely

2. What was included in the presidential memorandum and subsequent IRS guidance providing for the option of deferring the payment of certain payroll taxes? What did your organization or clients decide to do in this regard and why? l Included in memorandum and IRS

guidance: v Deferral of employee’s share of

social security taxes from September to December 2020

v Applies only to tax on compensation less than $4,000 in any bi-weekly period

v Deferral is only for January to April 2021

v Employers have to withhold during Q1 2021 and pay the deferred taxes by April 30, 2021

v Burden is on employers to be sure deferred taxes get paid

v Taxpayer could try to collect applicable taxes from ex-employees

l Participant response based on personal/organizational experience

3. What was included in the IRS guidance on what the CARES Act provides for regarding the deferral of certain payroll taxes? What has been the experience, if any, of your organization or clients with such provisions? l Guidance on deferrals:

v IRS clarified difference between a deposit and a payment toward an employment tax liability

v Employers may defer deposits of employer’s share of social security tax due during the payroll tax deferral period

v Employers may defer payments of the tax imposed on wages during the payroll tax deferral period

v Payroll tax deferral period is from March 27 to December 31, 2020

v Employers defer employer share of social security taxes by reducing required deposits or payments for the return period to the extent it falls within the payroll tax deferral period

v Reductions do not need to be applied evenly

l Participant response based on personal/organizational experience

4. What was the IRS guidance for employers on how to handle corrections for employment taxes on Form 941? l IRS released a draft of Form 941X in

July with final version to come by September

l Existing 941X to be used if adjusting a Q1 2020 period

l If adjusting Q2 but not making changes to employer’s share of social security taxes, it is recommended to not use the existing form and instead wait for the new Form 941X

l If adjusting Q2 and changing employer’s share of social security taxes, do not use the existing 941 and instead wait for the new Form 941X

l Form 941 is not to be sent with amended or similar notations to adjust any quarters

3. Deferral of Payroll Tax Obligations and More

Suggested Answers to Discussion Questions

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s5. What are the tax implications of debt

forgiveness and debt modifications for a borrower? l General rule is that the cancellation of

debt triggers ordinary income l Several exceptions exist where debt

cancellation is not taxable, including PPP forgiveness and cancellation of qualified home mortgage debt

l No taxable income if a debtor is bankrupt or insolvent

l Significant modification can be viewed as COD income to the extent the adjusted issue price of the modified instrument exceeds the adjusted issue price of the original instrument

l A mere deferral of repayment or a reduction in the interest rate for a small business is not cancellation of debt income

6. What have been some changes in the PPP loan forgiveness rules and why are some tax advisors suggesting that borrowers wait to file a loan forgiveness application? What are your organizations and clients doing in this regard and why? l Changes to loan forgiveness:

v Forgiveness loans have already been eased

v Originally 75% of the loan had to be used for payroll expenses, it was then reduced to 60%, and it could be changed again

v SBA now includes vision and dental benefits are payroll expenses

v Rumors that the SBA may give full loan forgiveness for small loans, perhaps those under $20,000

l Participant response based on personal/organizational experience

7. What are the IRS regulations regarding charitable contributions made by individuals and businesses in return forstate and local tax credits? l Individuals:

v No charitable contribution deduction is allowed for federal income tax purposes

v Quid pro principle applies whether the party doing it is the donee or a third party

v SALT credits received for the donation can be disregarded if they don’t exceed 15% of the taxpayer’s payment

v IRS safe harbor applies only to payments of cash and not property

l Businesses: v Payments are deductible as

ordinary and necessary business expenses

v Payments not treated as charitable contributions

v The safe harbor doesn’t apply to owners of specified pass-throughs if the credits reduce state and local tax

Suggested Answers to Discussion Questions (continued)

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1. Which taxes are subject to the option of deferral as per the presidential memorandum of August 2020 for September through December 2020?

a) employee share of social security taxes

b) all social security and Medicare taxes

c) FUTA

d) federal income taxes

2. What was the payroll tax deferral period made available under the CARES Act?

a) March 27, 2020 to December 31, 2020

b) September 1, 2020 to December 31, 2020

c) September 1, 2020 to April 30, 2021

d) January 1, 2021 to April 30, 2021

3. How should an employer handle corrections for employment taxes related to Q1 of 2020 according to the IRS guidance?

a) resend a form 941 with amended notation written on it

b) use the existing 941X form

c) wait for the new Form 941X to be released

d) wait for correspondence from the IRS

4. Which of the following is correct about the tax treatment of income from debt cancellation?

a) Cancellation of debt never triggers ordinary income.

b) Debt cancellation is taxable under all circumstances.

c) Forgiveness of loans under the PPP program is taxable.

d) Income is taxable if the debtor is bankrupt or insolvent.

5. Which of the following is correct about interest on tax refunds for the 2019 tax year?

a) The IRS is required to issue interest on tax refunds then they are paid 90 days after the return is filed.

b) Interest on refunds applies to corporations as opposed to individual tax returns.

c) They will be taxable income for the 2020 returns.

d) The calculation of interest for 2019 was based on the postponed deadline date of July 15, 2020.

6. Which of the following is correct about the centralized partnership audit regime created by the Bipartisan Budget Act?

a) All partnerships are prohibited from opting out of the BBA regime.

b) IRS audit adjustments are made at the partnership level.

c) Only partnerships with 100 or more partners can opt out of the BBA regime.

d) Partnerships CANNOT push out IRS audit adjustments to its partners.

7. Which of the following is correct about the workaround to the SALT cap using charitable contributions?

a) The IRS revised its initial regulations and now allows for a charitable contribution deduction when there is a quid pro quo.

b) The IRS quid pro quo principle does NOT apply when the party doing it is a third party.

c) SALT credits received for a donation can be disregarded if they are less than 15% of the taxpayer’s payment.

d) Such payments are treated similarly for tax purposes by individuals and specified pass-through entities.

You may want to use these objective questions to test knowledge and/or to generate further discussion; these questions are only for group live purposes. Most of these questions are based on the video segment, a few may be based on the reading for self-study that starts on page 3–12.

Objective Questions

3. Deferral of Payroll Tax Obligations and More

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8. Why did the IRS make the decision in August to allow the use of digital signatures on specified forms that cannot be filed electronically?

a) improved IT infrastructure within the IRS

b) processing effectiveness

c) identity theft risks

d) protect the health of taxpayers and tax professionals

9. Employers may choose to defer withholding of certain taxes on compensation made between September and December 2020 if the total amount of wages is less than:

a) $5,000 per month.

b) $1,000 per bi-weekly pay period.

c) $4,000 per week.

d) $4,000 per bi-weekly pay period.

10. Which of the following is correct about qualified plan loan offsets (QPLO)?

a) A QPLO amount is a plan loan offset treated as distributed from a qualified employer plan for any reason.

b) Not all plan loan offsets are qualified plan loan offsets.

c) A QPLO is NOT treated as being distributed from a qualified employer plan if by reason of the termination of the employee.

d) QPLO amounts must be rolled over to another retirement plan within 30 days of distribution.

Objective Questions (continued)

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Self-Study Option

Reading (Optional for Group Study)

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IRS ADDS SIX MORE FORMS TO LIST THAT CAN BE SIGNED DIGITALLY; 16 NOW AVAILABLE

https://www.irs.gov/newsroom/irs-adds-six-more-forms-to-list-that-can-be-signed-digitally-16-now-available IR-2020-206, September 10, 2020

WASHINGTON — On August 28, the IRS announced that it would temporarily allow the use of digital signatures on certain forms that cannot be filed electronically. Today, the agency added several more forms (PDF) PDF to that list.

The IRS made this decision to help protect the health of taxpayers and tax professionals during the COVID-19 pandemic. The change will help to reduce in-person contact and lessen the risk to taxpayers and tax professionals, allowing both groups to work remotely to timely file forms.

The IRS added the following forms to the list of those being accepted digitally:

l Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return;

l Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return;

l Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;

l Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons;

l Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; and

l Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner.

The forms are available at IRS.gov and through tax professional's software products. These forms cannot be e-filed and generally are printed and mailed.

The below list was announced August 28, and all of these forms can be submitted with digital signatures if mailed by or on December 31, 2020:

l In order to ensure adherence to NASBA guidelines regarding self-study, the CPA Report and CPA Report Government/Not-for-Profit Self-Study Professional Education Centers are no longer available. Customers should contact their company administrators for information on taking course exams and receiving CPE credit for the courses.

l Customers may contact Kaplan Financial Education at cpesupport@kaplan.com to obtain certificates previously earned through the CPA Report Self-Study and CPA Report Government/Not-for-Profit Self-Study Professional Education Centers.

l Customers interested in the self-study format of the CPA Report can find information on Kaplan Financial Education's self-study libraries at Online Accounting CPE Courses.

CPA Report Update

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l Form 3115, Application for Change in Accounting Method;

l Form 8832, Entity Classification Election;

l Form 8802, Application for U.S. Residency Certification;

l Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit;

l Form 1120-RIC, U.S. Income Tax Return For Regulated Investment Companies;

l Form 1120-C, U.S. Income Tax Return for Cooperative Associations;

l Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts;

l Form 1120-L, U.S. Life Insurance Company Income Tax Return;

l Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return; and

l Form 8453 series, Form 8878 series, and Form 8879 series regarding IRS e-file Signature Authorization Forms.

The IRS will continue to monitor this temporary option for e-signatures and determine if additional steps are needed.

In addition, the IRS understands the importance of digital signatures to the tax community. The agency will continue to review its processes to determine where long-term actions can help reduce burden for the tax community, while at the same appropriately balancing that with critical security and protection against identity theft and fraud.

BUDGET & SPENDING Issued on: August 8, 2020

https://www.whitehouse.gov/presidential-actions/memorandum-deferring-payroll-tax-obligations-light-ongoing-covid-19-disaster/

MEMORANDUM FOR THE SECRETARY OF THE TREASURY

SUBJECT: Deferring Payroll Tax Obligations in Light the Ongoing COVID-19 Disaster

By the authority vested in me as President by the Constitution and the laws of the United States of America, it is hereby ordered as follows:

Section 1. Policy. The 2019 novel coronavirus (COVID-19) that originated in

the People’s Republic of China has caused significant, sudden, and unexpected disruptions to the American economy. On March 13, 2020, I determined that the COVID-19 pandemic is of sufficient severity and magnitude to warrant an emergency declaration under section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121-5207, and that is still the case today. American workers have been particularly hard hit by this ongoing disaster. While the Department of the Treasury has already undertaken historic efforts to alleviate the hardships of our citizens, it is clear that further temporary relief is necessary to support working Americans during these challenging times. To that end, today I am directing the Secretary of the Treasury to use his authority to defer certain payroll tax obligations with respect to the American workers most in need. This modest, targeted action will put money directly in the pockets

MEMORANDUM ON DEFERRING PAYROLL TAX OBLIGATIONS IN LIGHT OF THE ONGOING COVID-19 DISASTER

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of American workers and generate additional incentives for work and employment, right when the money is needed most.

Sec. 2. Deferring Certain Payroll Tax Obligations. The Secretary of the Treasury is hereby directed to use his authority pursuant to 26 U.S.C. 7508A to defer the withholding, deposit, and payment of the tax imposed by 26 U.S.C. 3101(a), and so much of the tax imposed by 26 U.S.C. 3201 as is attributable to the rate in effect under 26 U.S.C. 3101(a), on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020, subject to the following conditions:

(a) The deferral shall be made available with respect to any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods.

(b) Amounts deferred pursuant to the implementation of this memorandum shall be deferred without any penalties, interest, additional amount, or addition to the tax.

Sec. 3. Authorizing Guidance. The Secretary of the Treasury shall issue guidance to implement this memorandum.

Sec. 4. Tax Forgiveness. The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.

Sec. 5. General Provisions. (a) Nothing in this memorandum shall be construed to impair or otherwise affect:

(i) the authority granted by law to an executive department or agency, or the head thereof; or

(ii) the functions of the Director of the Office of Management and Budget relating to budgetary, administrative, or legislative proposals.

(b) This memorandum shall be implemented consistent with applicable law and subject to the availability of appropriations.

(c) This memorandum is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.

(d) You are authorized and directed to publish this memorandum in the Federal Register.

DONALD J. TRUMP

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ROLLOVER RULES FOR QUALIFIED PLAN LOAN OFFSET AMOUNTS

https://www.federalregister.gov/documents/2020/08/20/2020-16564/rollover-rules-for-qualified-plan-loan-offset-amounts

AGENCY: Internal Revenue Service (IRS), Treasury

ACTION: Notice of proposed rulemaking.

SUMMARY:

This document sets forth proposed regulations relating to amendments made to section 402(c) of the Internal Revenue Code (Code) by section 13613 of the Tax Cuts and Jobs Act, Public Law 115-97 (131 Stat. 2054) (TCJA). Section 13613 of TCJA provides an extended rollover period for a qualified plan loan offset, which is a type of plan loan offset. These regulations affect participants, beneficiaries, sponsors, and administrators of qualified employer plans.

DATES:

Written or electronic comments and requests for a public hearing must be received by October 5, 2020.

ADDRESSES:

Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-116475-19) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The IRS expects to have limited personnel available to process public comments that are submitted on paper through mail. Until further notice, any comments submitted on paper will be considered to the extent practicable. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment received to its public docket, whether submitted

electronically or in hard copy. Send hard copy submissions to CC:PA:LPD:PR (REG-116475-19), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT:

Concerning the proposed amendments to the regulations, Naomi Lehr at (202) 317-4102, Vernon Carter at (202) 317-6799, or Pamela Kinard at (202) 317-6000; concerning submissions of comments and requests for a hearing, Regina Johnson at (202) 317-5177 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document sets forth proposed amendments to 26 CFR part 1, by adding § 1.402(c)-3 to the Income Tax Regulations solely to reflect changes to section 402(c) of the Code, as amended by section 13613 of TCJA. On December 20, 2019, the Further Consolidated Appropriations Act of 2020, Public Law 116-94 (133 Stat. 2534) (the Act), was enacted. Section 114 of Division O of the Act, titled “Setting Every Community Up for Retirement Enhancement Act of 2019” (SECURE Act), amended section 401(a)(9) of the Code by changing the required beginning date applicable to section 401(a) plans and other eligible retirement plans described in section 402(c)(8). The Treasury Department and IRS anticipate providing separate guidance on section 114 of the SECURE Act, including amending § 1.402(c)-2 to reflect changes made by the SECURE Act and to add new level designations for each paragraph in the questions and answers to satisfy Federal Register requirements. It is anticipated that the proposed § 1.402(c)-3 will be combined with § 1.402(c)-2 in connection with that project (including replacing Q&-9 of § 1.402(c)-2 with paragraph (a) of proposed § 1.402(c)-3).

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1. Plan Loans, Eligible Rollover Distributions, and Plan Loan Offset Amounts

Section 72(p)(1) provides that if, during any taxable year, a participant or beneficiary receives (directly or indirectly) any amount as a loan from a qualified employer plan (as defined in section 72(p)(4)(A)),[1] such amount shall be treated as having been received by the individual as a distribution from the plan. For certain plan loans, section 72(p)(2) provides an exception to the general treatment of loans as distributions under section 72(p)(1).

For the exception under section 72(p)(2) to apply so that a plan loan is not treated as a distribution under section 72(p)(1) for the taxable year in which the loan is received, the loan generally must satisfy three requirements:

(1) The loan, by its terms, must satisfy the limits on loan amounts, as described in section 72(p)(2)(A);

(2) The loan, by its terms, generally must be repayable within 5 years, as described in section 72(p)(2)(B); and

(3) The loan must require substantially level amortization over the term of the loan, as described in section 72(p)(2)(C).

Section 401(a)(31) requires that a plan qualified under section 401(a) provide for the direct transfer of eligible rollover distributions. A similar rule applies to section 403(a) annuity plans, section 403(b) tax-sheltered annuities, and section 457 eligible governmental plans. See generally sections 403(a)(1), 403(b)(10), and 457(d)(1)(C).

Sections 402(c)(3) and 408(d)(3) provide that any amount distributed from a qualified plan or individual retirement account or annuity (IRA) will be excluded from income if it is transferred to an eligible retirement plan no later than the 60th day following the day the distribution is received. A similar rule applies to section 403(a) annuity plans, section 403(b) tax-sheltered annuities, and section 457 eligible governmental plans. See

generally sections 403(a)(4)(B), 403(b)(8)(B), and 457(e)(16)(B).

Sections 402(c)(3)(B) and 408(d)(3)(I) provide that the Secretary may waive the 60-day rollover requirement “where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.” See generally Rev. Proc. 2016-47, 2016-37 I.R.B. 346, which sets forth a self-certification procedure that taxpayers may use in certain circumstances to claim a waiver of the 60-day deadline for completing a rollover under section 402(c)(3)(B) or 408(d)(3)(I), and Rev. Proc. 2020-4, 2020-1 I.R.B. 148, which sets forth procedures that taxpayers may use to request a waiver of the 60-day rollover deadline by submitting a request for a private letter ruling.[2]

Section 1.402(c)-2, Q&A-3(a), provides that, unless specifically excluded, an eligible rollover distribution means any distribution to an employee (or to a spousal distributee described in § 1.402(c)-2, Q&A-12(a)) of all or any portion of the balance to the credit of the employee in a qualified plan. Section 1.402(c)-2, Q&A-3(b), provides that certain distributions (for example, required minimum distributions under section 401(a)(9)) are not eligible rollover distributions.

Section 1.402(c)-2, Q&A-9(a), provides that a distribution of a plan loan offset amount (as defined in § 1.402(c)-2, Q&A-9(b)) is an eligible rollover distribution if it satisfies § 1.402(c)-2, Q&A-3. Thus, an amount not exceeding the plan loan offset amount may be rolled over by the employee (or spousal distributee) to an eligible retirement plan within the 60-day period described in section 402(c)(3), unless the plan loan offset amount fails to be an eligible rollover distribution for another reason.

Section 1.402(c)-2, Q&A-9(b), provides that a distribution of a plan loan offset amount is a distribution that occurs when, under the plan terms governing the loan, the employee's accrued benefit is reduced (offset) in order to repay the loan. This may occur when, for example, the terms

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governing a plan loan require that, in the event of an employee's termination of employment or request for a distribution, the loan is to be repaid immediately or treated as in default. A plan loan offset may also occur when, under the terms of the plan loan, the loan is canceled, accelerated, or treated as if it is in default (for example, if the plan treats a loan as in default upon an employee's termination of employment or within a specified period thereafter). See also § 1.72(p)-1, Q&A-13(a)(2). Because a plan loan offset is an actual distribution for purposes of the Code, not a deemed distribution under section 72(p), a plan loan offset cannot occur prior to a distributable event. See generally § 1.72(p)-1, Q&A-13(b).

2. Qualified Plan Loan Offset Amounts

Section 13613 of TCJA amended section 402(c)(3) of the Code to provide an extended rollover deadline for qualified plan loan offset (QPLO) amounts (as defined in section 402(c)(3)(C)(ii)).[3] Any portion of a QPLO amount (up to the entire QPLO amount) may be rolled over into an eligible retirement plan by the individual's tax filing due date (including extensions) for the taxable year in which the offset occurs.

A QPLO amount is defined in section 402(c)(3)(C)(ii) as a plan loan offset amount that is treated as distributed from a qualified employer plan to an employee or beneficiary solely by reason of:

(1) The termination of the qualified employer plan, or

(2) The failure to meet the repayment terms of the loan from such plan because of the severance from employment of the employee.

In addition, section 402(c)(3)(C)(iv) provides that the extended rollover period will not apply “to any plan loan offset amount unless such plan loan offset amount relates to a loan to which section 72(p)(1) does not apply by reason of section 72(p)(2).”

Section 301.9100-2(b) of the regulations provides rules for automatic six-month

extensions to make regulatory or statutory elections. Under this rule, a taxpayer will receive an automatic extension of 6 months from the due date of a return, excluding extensions, to make elections that otherwise must be made by the due date of the return plus extensions, provided that:

(1) The taxpayer's return was timely filed for the year the election should have been made; and

(2) The taxpayer takes appropriate corrective action within the six-month period.

Section 301.9100-2(b) further provides that paragraph (b) does not apply to regulatory or statutory elections that must be made by the due date of the return excluding extensions.

Explanation of Provisions

1. In General

These proposed regulations add § 1.402(c)-3 to take into account changes to the rollover rules made by section 13613 of TCJA with respect to QPLO amounts. As an initial matter, the proposed regulations confirm that a QPLO is a type of plan loan offset; accordingly, most of the general rules relating to plan loan offset amounts apply to QPLO amounts. For example, the rule that a plan loan offset amount is an eligible rollover distribution applies to a QPLO amount. In addition, the rules in § 1.401(a)(31)-1, Q&A-16 (guidance concerning the offering of a direct rollover of a plan loan offset amount), and § 31.3405(c)-1, Q&A-11 (guidance concerning special withholding rules with respect to plan loan offset amounts), applicable to plan loan offset amounts in general, apply to QPLO amounts. The proposed regulations provide examples to illustrate the interaction of the special rules for QPLOs with the general rules for plan loan offsets.

2. Rollover Period for Plan Loan Offset Amounts, Including QPLO Amounts

Consistent with § 1.402(c)-2, Q&A-9, the proposed regulations provide that a distribution of a plan loan offset amount that is an eligible rollover distribution and not a QPLO amount may be rolled over by the

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employee (or spousal distributee) to an eligible retirement plan (as defined in section 402(c)(8)(B)) within the 60-day period set forth in section 402(c)(3)(A). While a plan loan offset generally is subject to this 60-day rollover period, there are special rules for the waiver of the 60-day rollover deadline. For further discussion of the special rules, see the Background section of this preamble.

Consistent with the amended provisions of section 402(c)(3)(C), the proposed regulations provide that a distribution of a plan loan offset amount that is an eligible rollover distribution and a QPLO amount may be rolled over by the employee (or spousal distributee) to an eligible retirement plan through the period ending on the individual's tax filing due date (including extensions) for the taxable year in which the offset is treated as distributed from a qualified employer plan. Thus, a taxpayer with an eligible rollover distribution that is a QPLO amount may roll over any portion of the distribution to an eligible retirement plan, including another qualified retirement plan (if that plan permits) or an IRA, by the taxpayer's deadline for filing income taxes for the year of the distribution, including extensions.

If a taxpayer to whom a QPLO amount is distributed satisfies the conditions in § 301.9100-2(b), the taxpayer will have an extended period past his or her tax filing due date in which to complete a rollover of the QPLO amount, even if the taxpayer does not request an extension to file his or her income tax return but instead files the return by the unextended tax filing due date. For example, if, on June 1, 2020, Taxpayer A has an eligible rollover distribution of $10,000 that is a QPLO amount, she may be able to roll over the $10,000 amount as late as October 15, 2021. Pursuant to § 301.9100-2(b), this automatic six-month extension applies if Taxpayer A timely files her tax return by April 15, 2021 (the due date of her return), rolls over the QPLO amount within the six-month period ending on October 15, 2021, and amends her return by October 15, 2021, as necessary to reflect rollover. See the further discussion of § 301.9100-2(b) in the Background section of this preamble.

3. Definitions of Plan Loan Offset Amount, QPLO Amount, and Qualified Employer Plan

Consistent with § 1.402(c)-2, Q&A-9(b), the proposed regulations provide that a plan loan offset amount is the amount by which, under plan terms governing a plan loan, an employee's accrued benefit is reduced (offset) in order to repay the loan (including the enforcement of the plan's security interest in the employee's accrued benefit). A distribution of a plan loan offset amount is an actual distribution, not a deemed distribution under section 72(p).

Section 1.402(c)-3(a)(2)(iii)(B) of the proposed regulations defines a QPLO amount as a plan loan offset amount that satisfies two requirements. First, the plan loan offset amount must be treated as distributed from a qualified employer plan to an employee or beneficiary solely by reason of the termination of the qualified employer plan, or the failure to meet the repayment terms of the loan from such plan because of the severance from employment of the employee. Second, the plan loan offset amount must relate to a plan loan that met the requirements of section 72(p)(2) immediately prior to the termination of the qualified employer plan or the severance from employment of the employee, as applicable.

The proposed regulations define a qualified employer plan, for purposes of the QPLO amount definition, as a qualified employer plan as defined in section 72(p)(4). For a discussion of the definition of a qualified employer plan, see the Background section of this preamble.

Please see full document at https://www.federalregister.gov/documents/2020/08/20/2020-16564/rollover-rules-for-qualified-plan-loan-offset-amounts

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tWILLIAMS: On August 8, 2020, the White House issued a “Memorandum on

Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster” allowing deferral of the withholding, deposit, and payment of the tax on wages or compensation, paid during the period of September 1, 2020 through December 31, 2020, subject to the following conditions:

a) “The deferral shall be made available with respect to any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods.

b) Amounts deferred pursuant to the implementation of this memorandum shall be deferred without any penalties, interest, additional amount, or addition to the tax.”

On September 11, 2020 the IRS released a revised Form 941-X Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, (Rev. July 2020) that will allow revision to Forms 941 that are impacted by provisions found in the Families First Coronavirus Relief Act and/or the CARES Act that impacted second quarter payroll. The related revised instructions to the form were also issued at the same time. Employers who had been delaying filing revised Forms 941 for the second quarter awaiting the finalization of this form should now file those revisions.

It seems that payroll taxes have taken a greater position in the tax world than income taxes. We have tax credits paid through payroll taxes. We have deferral options for employers and self-employed individuals. And we have a presidential memorandum on another deferral option for employees.

Barbara Weltman, president of Big Ideas for Small Business starts by telling us about the presidential deferral pronouncement, and continues with the IRS developments on payroll-related matters.

WELTMAN: In early August the president issued a memorandum providing for deferral of the employee's share of social security taxes from September 1, 2020 through December 31, 2020. The deferral would apply only with respect to the tax on compensation less than $4,000 in any bi-weekly pay period, which amounts to compensation of about $100,000 a year. The language was very general, leaving the details up to the secretary of the treasury and even encouraging him to explore ways to give tax forgiveness for the deferred FICA. Now we have IRS guidance.

The guidance refers to wages under Code Section 3121(a) and compensation under Code Section 3231(e) that are paid during the period beginning September 1, 2020 through the end of the year. It's the employee's share of social security taxes that gets deferred. They are referred to as deferred applicable taxes.

But deferral is only for the period beginning January 1, 2021 and ending on April 30, 2021. This means that employers have to withhold during the first quarter of 2021 and pay the deferred taxes by April 30, 2021.

If they're not paid through withholding in Q1 2021, interest penalties and additions to tax begin to accrue on May 1, 2021. So, the burden is on the employer to be sure the deferred taxes get paid.

Video Transcript

3. Deferral of Payroll Tax Obligations and More

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t If an employee is no longer working for the company, the employer is on the hook for the deferred taxes. The guidance says, and I quote, "If necessary, the affected taxpayer may make arrangements to otherwise collect the applicable taxes from the employee," close quote.

But really, how is an employer supposed to collect the deferred taxes from an employee who is in the wind? I suspect this deferral option won't be popular among employers.

WILLIAMS: But what should our clients do if they want to implement this deferral for employees?

WELTMAN: The IRS is revising Form 941 to take into account the deferral for employees, the withholding that isn't made to cover the employee's share of social security taxes. The deferred amount will be accounted for on page three in part three of the form, line 24. I haven't seen the draft of the form, but by the time you're viewing this program it will probably be posted.

WILLIAMS: The presidential memorandum dealt with the employee portion of FICA. Barbara talks about the employer portion that can be deferred, the employee's share of social security taxes. This was a measure in the CARES Act.

WELTMAN: The IRS has extensive FAQs on the employer's deferral, and it has updated them. For example, the IRS has clarified the difference between a deposit and a payment toward an employment tax liability. Depositing taxes and paying taxes are separate obligations, and there are failure to deposit penalties and failure to pay penalties.

So, we have to be careful to determine whether a client is subject to a deposit requirement and pays employment taxes. Employers may defer deposits of the employer's share of social security tax due during the payroll tax deferral period and payments of the tax imposed on wages during that period. The payroll tax deferral period began on March 27, 2020 and ends on December 31, 2020.

The IRS has made it clear exactly how an employer does deferral. An employer defers the employer's share of social security tax by reducing required deposits or payments for the calendar quarter by an amount up to the maximum of the employer's share of social security tax for the return period to the extent the return period falls within the payroll tax deferral period.

This reduction does not need to be applied evenly during the return period. For example, if an employer will have $20,000 in total liability for the employer's share of social security tax for the third quarter of 2020, has not yet reduced its deposits for deferral, and has one deposit of $20,000 remaining for that calendar quarter, the employer may defer the entire $20,000 deposit.

WILLIAMS: Keep in mind reporting requirements. Form 941 hadn't been updated for the first quarter to reflect deferral, but it has for the second, third, and fourth quarters. Employers that reported the full amount of employment tax liability on the form for the first quarter, but chose to defer deposits, had a discrepancy for that quarter.

WELTMAN: The IRS said it was sending notices to these employers identifying the difference between the liability reported on Form 941 for the first calendar quarter and the deposits and payments made for the first calendar

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t quarter for an unresolved amount. The notice has additional information instructing the employer how to inform the IRS that it deferred a deposit or payment of the employer's share of social security tax due after March 27, 2020 for the first quarter of 2020.

The new FAQs cover a number of other matters, such as the interaction with the research payroll tax credit for small businesses and the work opportunity tax credit.

And I want to mention that a draft Schedule SE Form 1040 or 1040SR for self-employment tax has a new part three to figure the maximum deferral amount. Remember self-employed individuals can also opt to defer the employer's share of social security taxes. It appears from the form that you figure the regular self-employment tax, one-half of which is deductible. Then you separately figure the deferral amount. Remember that deferral is optional.

The FAQ explains how to determine net earnings for the deferral period. Any reasonable method can be used, or you can rely on a percentage. That is to assume that 77.5% of net earnings for the year are in the deferral period.

WILLIAMS: Barbara Weltman gives us her views on the option for deferred payroll taxes.

WELTMAN: There is still much confusion about deferral. How is this going to affect PPP loan forgiveness? How are businesses going to pay for repayment in 2021 and 2022?

Here's where we come in, providing advice on how to handle deferral. It's been a tax mantra forever that deferral is good. But for some businesses and self-employed individuals, deferral may create problems. So, watch out.

WILLIAMS: Some employers who planned on taking advantage of deferral or using the paid sick leave and paid family leave tax credits didn't deposit as much in payroll taxes as the IRS thought they would. The IRS generated letters to employers. Now what?

WELTMAN: Following a letter by a congressman the IRS recognized that it made a mistake in sending out CP14 balance due notices to employers informing them of their failure to deposit taxes.

The IRS apparently didn't factor in the employer's intention to defer certain payroll taxes or use payroll taxes to give paid sick leave and paid family leave to employees for which they could claim tax credits.

WILLIAMS: Barbara discusses what employers are supposed to do if they need to make corrections to their Form 941.

WELTMAN: You may recall that the IRS released a draft of Form 941X back in July. The IRS is expected to have a final version of this form by the end of September. The IRS has some guidance for employers on how to handle corrections for employment taxes.

Number one: If adjusting a 1Q 2020 or earlier form, you can use the existing 941X. Number two: If adjusting a 2Q or later and not making any increase or decrease to the employer's share of social security tax or any of the new COVID related lines that were added to the Q2 Form 941, the IRS strongly recommends that you not use the existing Form 941X and instead wait for the new Form 941X revision to be released. Number three: If adjusting 2Q or later but are making any increase or decrease to

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t the employer's share of social security tax or any of the new COVID related lines, do not use the existing 941X. Wait for the new Form 941X revision. Number four: don't send a Form 941 with amended or similar notation written on it in an attempt to adjust any quarter.

If you have already done either step three or four, wait for correspondence from the IRS to find out if the return was processable or had to be rejected. Given the back load of paper forms and correspondence due to COVID-19, the IRS is unable to approximate how long that may be.

WILLIAMS: During the pandemic there have been a lot of loans to help keep individuals and businesses afloat. If the money is repaid, it’s all well and good. But too often the funds aren't repaid. This triggers tax consequences for the borrower and the lender. Barbara Weltman is telling us from a borrower’s perspective what happens when loans are canceled and if cancellation of debt income is always ordinary.

WELTMAN: As you know, the general rule is that the cancellation of debt triggers ordinary income. There are several exceptions in which debt cancellation isn't taxable at all, such as the extent of forgiveness of loans under the paycheck protection program or cancellation of qualified home mortgage debt in 2020 up to $2 million. And, of course, there's no income if the debtor is bankrupt or to the extent of a debtor's insolvency.

Usually a cancellation of debt is ordinary income. Remember, there's no sale or exchange involved. But a stockbroker who had debt over $3 million canceled argued that it was capital gain. The facts of the case matter.

To entice him to change firms, he was given a loan. When he was terminated, the financial industry regulatory authority arbitration panel awarded him the cancellation of debt. He argued that this was an exchange for his book, the information about his clients.

The tax court rejected his argument and now an appellate court has agreed the tax court applied the origin of the claim test, which says to look at the underlying reason for the transaction. The appellate court said that the application of this test was not clearly erroneous, meaning it was okay to be used. There is no evidence to show that the cancellation of debt was the price of his book.

WILLIAMS: Things get complicated when families get involved. Let's look at the unpaid funds from the lender’s perspective.

WELTMAN: We had another case in which a family business advanced $111 million to one son to help him start business ventures. Eventually, when the advances weren't repaid, the business wrote them off as bad debts.

But an appellate court affirming the tax court said the advances weren't loans because there was no bonafide debtor/creditor relationship. So, no bad debt deduction was allowed. And the advances weren't ordinary and necessary business expenses, so there was no other way to deduct them.

The lesson here is that family transactions attract special scrutiny from the IRS. So be sure that they're handled properly.

WILLIAMS: During economic downturns, some businesses may want to restructure their debt. What should borrowers be concerned about in this process assuming lenders are amenable to restructuring?

WELTMAN: Restructuring can result in taxable income for borrowers. As I've just mentioned, the cancellation of debt is taxable. This is especially so where corporations issued debt instruments.

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t Where there is a significant modification of a debt instrument this is viewed as COD income to the extent that the adjusted issue price of the modified debt instrument exceeds the adjusted issue price of the original debt instrument.

For small businesses that merely modify their loan arrangements with lenders, look to see if the amount of debt is reduced. If it's merely deferral of repayment or a reduction in the interest rate, that's not cancellation of debt income.

WILLIAMS: PPP debt forgiveness is not automatic. Borrowers need to file a loan forgiveness application; however, some tax advisors are suggesting that there is no rush to do so. Barbara explains why.

WELTMAN: Clients who obtained a paycheck protection program loan can apply for loan forgiveness. The window to do this opened in mid-August, but there are some reasons why clients might want to wait a while before submitting their applications for loan forgiveness.

You may recall that the forgiveness loans were already eased. Initially, forgiveness depended on using 75% of the loan for payroll expenses. But then it was reduced to 60%. Could this be changed? And what's considered to be payroll expenses may also change.

Recently the SBA said vision and dental benefits are payroll expenses. What's more, there are rumors that the SBA may give full loan forgiveness for small loans, perhaps those under $20,000 or so. The best advice we can give our clients is to wait and see.

WILLIAMS: In August 2020, the IRS announced that it has begun sending out interest payments to those individuals who received refunds and filed tax returns after April 15 but before July 15. The IRS explains in the news release why the payments are being made. The COVID-19-related delay in the due date announced by the IRS in Notice 2020-23 triggered this special interest rule as follows:

“This provision is different from the long-standing 45-day rule, generally requiring the IRS to add interest to refunds on timely-filed refund claims issued more than 45 days after the return due date.

Instead, this year’s COVID-19-related July 15 due date is considered a disaster-related postponement of the filing deadline. Where a disaster-related postponement exists, the IRS is required, by law, to pay interest, calculated from the original April 15 filing deadline, as long as an individual files a 2019 federal income tax return by the postponed deadline − July 15, 2020, in this instance.

This refund interest requirement only applies to individual income tax filers − businesses are not eligible.”

The IRS has been busy getting ready for the next filing season. It has released a lot of draft forms. While the details don't really matter to us because we prepare and file returns on our computers, it is helpful to know what's changed. Barbara Weltman starts with the basic forms, Form 1040 and 1040SR.

WELTMAN: The basic tax forms, 1040 and 1040SR that will be used for 2020 are different from the 2019 version.

You can forget about the postcard return we'd heard about. The 1040SR is four pages. That's because it added lines, the large print, and the table with the standard deduction amounts.

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t The 1040 and 1040SR have new lines for the charitable contribution deduction for non-itemizers, the recovery rebate credit for those who received economic impact payments less than what they were entitled to, and estimated tax payments, which used to be on Schedule Three.

But now on the 2020 Schedule Three there's a new line for qualified sick and family leave credits for household employers and self-employed individuals. Amounts taken from Schedule H for household employers and a new form 7202 for self-employed people. What's more, virtual currency holdings is now on page one of the return.

WILLIAMS: And how do the new forms and schedules deal with deferral of the employer portion of social security in self-employment tax?

WELTMAN: As discussed, self-employed individuals can elect to defer the employer portion of social security taxes in self-employment tax, 6.2%. Remember employers could claim the deferral through paying and depositing less employment taxes.

Self-employed individuals must address the deferral on their income tax return. On Schedule 1 related to the deduction for self-employment tax it says, "Deductible part of self-employment tax." Remember it used to be one-half of self-employment tax. Schedule SE no longer has a long and short form. Instead it has parts one for figuring the tax, part two for figuring optional payments of the tax, and part three for figuring the maximum amount of deferral.

The deferred amount is entered as an “other tax payment” on Schedule 3. It's all rather confusing, but thankfully software knows where things go. The point for us to discuss with our clients is whether to do deferral.

If they've underpaid estimated taxes for 2020, deferral can help minimize or avoid penalties. But if they've paid enough they may want to let it go and not have to worry about making up the deferred amount in 2021 and 2022. Even if they're out of business by then, the obligation for the deferred amount won't go away.

WILLIAMS: This year there was a tremendous problem with mailed in checks because IRS personnel weren't there to open envelopes. So, are taxpayers going to be penalized?

WELTMAN: The IRS announced that it would temporarily stop mailing notices to taxpayers with balances due. So, CP501, CP503, and CP504 won't be going out to taxpayers because they may have mailed in their payments which are still sitting unopened. I'm sure the government is anxious to get to these payments. There's a lot of revenue just sitting around. I should also mention that the IRS is providing relief from bad check penalties for dishonored checks received between March 1 and July 15 due to delays in IRS processing.

WILLIAMS: The IRS also announced it was issuing interest on tax refunds. But, isn't the IRS required to do so?

WELTMAN: The IRS is required to issue interest on tax refunds when it pays them more than 45 days after the return has been filed. But this year we had the automatic extension to July 15 where a disaster related postponement exists, like what we had this year, the IRS is required by law to pay interest calculated from the original April 15 filing deadline as long as an individual filed a 2019 federal income tax return by the postponed deadline of July 15, 2020.

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t This required interest on refunds applies only to individual income tax returns, not to corporations. The IRS gave 13.9 million taxpayers interest on their tax refunds.

In most cases this happened through direct deposit just like the underlying refunds. We'll have to keep these interest payments in mind for 2020 returns because they're taxable income.

WILLIAMS: The IRS hasn't stopped auditing returns, although the numbers are way down. Barbara discusses why one of the key areas of interest when it comes to audits concerns partnerships.

WELTMAN: As you know, the Bipartisan Budget Act created a centralized partnership audit regime. Basically, the IRS audits the partnership and makes adjustments at the partnership level, although the partnership can opt to push them out to partners.

However, eligible partnerships can opt out of the BBA regime. An eligible partnership is one with 100 or fewer partners, all of whom are either individuals, C corporations, foreign entities that would be treated as C corporations if they were domestic, S corporations, or estates of deceased partners. In other words, small partnerships can opt out.

The IRS has a new website for the BBA centralized partnership audit regime. This is a one-stop location that the IRS says is for anything BBA related. Yes, it clearly explains the centralized partnership audit regime, but let me tell you that it doesn't include links to recent exceptions from amending partnership returns for partnerships subject to the BBA regime.

For example, it doesn't link to Rev. Proc. 2020-23, which allows such partnerships to file amended returns to take advantage of retroactive changes in the CARES Act, such as the fix for qualified improvement property. Let's hope the landing page is expanded to include all relevant information.

WILLIAMS: COVID-19 made what we thought was impossible, possible! It put in place policies and procedures that were going to take years and meetings upon meetings until they were going to be decided on and implemented. Many were surprised to see the IRS following the steps of all businesses and making adjustments for the taxpayers.

On August 28, 2020, the IRS announced several forms eligible to be signed via electronic signatures and on September 10, 2020, six more forms were added.

The initial memorandum on August 28, 2020, was not amended; it was simply revised to add the new forms. It also includes the following information regarding the types of electronic signature technologies that can be used for this program:

“Electronic and digital signatures appear in many forms when printed and may be created by many different technologies. No specific technology is required for this purpose during this temporary deviation.”

The new forms added to the list are:

l Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return;

l Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return;

l Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;

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t l Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons;

l Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; and

l Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner.

These forms joined the following forms initially qualified for digital signatures:

l Form 3115, Application for Change in Accounting Method;

l Form 8832, Entity Classification Election;

l Form 8802, Application for U.S. Residency Certification;

l Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit;

l Form 1120-RIC, U.S. Income Tax Return For Regulated Investment Companies;

l Form 1120-C, U.S. Income Tax Return for Cooperative Associations;

l Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts;

l Form 1120-L, U.S. Life Insurance Company Income Tax Return;

l Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return; and

l Form 8453 series, Form 8878 series, and Form 8879 series regarding IRS e-file Signature Authorization Forms.

These forms are accepted with digital signatures as long as they are mailed on or before December 31, 2020.

One aspect of telecommuting is handling Tax Court cases. Barbara gives us her insights about changes in procedures at the Tax Court.

WELTMAN: The tax court made several adjustments to its procedures to enable cases to proceed during the pandemic. Let me run through them.

First, the court will accept electronically filed stipulated decisions bearing digital image signatures. The court is revising the practitioner's guide to electronic case access and filing to reflect this adjustment. There are also some changes for the submission of documentary evidence. The court posted the changes on its website. The same is true for procedures relating to subpoenas. And it updated its administrative order 2020-03 to clarify that limited entries of appearance may be filed in cases that were on canceled trial sessions. If you practice before the tax court you should review the adjustments in detail.

WILLIAMS: Filing things electronically has become the norm during the pandemic. But until now we couldn't do this for amended income tax returns for individuals. Barbara gives us an update on 1040-X filings.

WELTMAN: About three million individuals file Form 1040-X each year. Until now this had to be done on paper. But the IRS announced that amended returns for individuals can now be e-filed using commercial tax filing software. This should simplify the amended return process, avoid mistakes, and hopefully lead to quicker IRS responses.

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t For example, if an individual files an amended return to claim a refund, it may come quicker than with a paper amended return. But the IRS noted that e-filing will only apply to amended returns for 2019. I guess eventually they'll expand the program to allow e-filing of amended returns for earlier years not yet closed by the statute of limitations.

WILLIAMS: Barbara Weltman gives us an update on other changes for filings.

WELTMAN: As you know, the 1040s already use electronic signatures when the returns are filed electronically. The taxpayer uses a self-selected PIN if the taxpayer self files. If the return is filed by a paid preparer, the professional's PIN is used. Now the IRS is allowing the use of digital signatures on certain forms that can't be filed electronically.

The forms can then use a digital signature on Form 3115 for a change in accounting method, Form 8832 for entity classification election, and certain other forms.

This applies only if the forms are mailed by December 31, 2020. Whether the use of e-signatures will be allowed after this date is unclear. The IRS says it's monitoring this temporary option.

WILLIAMS: One of the ongoing points of political contention is the SALT cap, the $10,000 limit on the deductions of state and local taxes by individuals who itemize rather than taking the standard deduction. Several states, including Connecticut, New Jersey, and New York created a workaround using charitable contributions. The IRS pushed back.

WELTMAN: Some states have given their residents state and local income tax credits for donations to certain funds. The IRS previously ruled and then issued proposed regulations stating that where there's a quid pro quo no charitable contribution deduction is allowed for federal income tax purposes.

Last June there were final regulations on this, but now we have more final regulations clarifying a number of points. For example, the new final regs make it clear that the quid pro quo principle applies whether the party doing it is the donee or a third party.

WILLIAMS: But isn't there a safe harbor that individuals can use to claim charitable contribution deductions despite a quid pro quo?

WELTMAN: Under the safe harbor the SALT credits received for the donation can be disregarded if they don't exceed 15% of the taxpayer's payment. But the new regs make it clear that the safe harbor only applies to payments of cash and not property.

WILLIAMS: Is it different for businesses? Barbara discusses the treatment for businesses that make certain contributions and receive state and local tax credits.

WELTMAN: When it comes to businesses, C corporations and specified pass-through entities, it's different. The regs make it clear that payments are deductible as ordinary and necessary business expenses. They are not treated as charitable contributions.

But for owners of these specified pass-throughs the safe harbor doesn't apply if the credits reduce state and local tax. Let me clarify what's meant by specified pass-through entities. These are entities that are regarded for all federal income tax purposes as separate from their owners and state and local taxes imposed directly on the entities for carrying on a trade or business. A good example of a specified pass-through is a limited liability

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t company. I suggest you go back to guidance issued last year in Rev. Proc. 2019-12, which contains a number of good examples of how this works.

WILLIAMS: But can some payments to corporations by states or cities be taxable?

WELTMAN: States often provide economic incentives to businesses that relocate and create new jobs to boost the local economy. Incentives may be tax breaks or grants. A recent appellate court focused on New Jersey's cash grants given without restriction on their use to businesses that would relocate or expand and create a certain number of high paying jobs.

The grants were a set percentage, 30% to 80% of state income tax withholding on wages. The question before the court was whether the grants were contributions to the corporation's capital under Code Section 118, which could mean the grants were excludable from gross income or taxable. The tax court said they were contributions to capital, but the Third Circuit reversed. The reason why the appellate court held the grants to be taxable was the discretion that the company had with respect to the disbursements. There were no restrictions. It could use the money in any way it wanted as long as it maintained a certain number of employees in the state for a certain period of time.

The Tax Cuts and Jobs Act specifically amended Code Section 118 to exclude from the definition of contributions to capital any contributions by a government entity. So, we're not likely to see similar cases in the future. But companies that have previously received tax incentives to relocate may be on the IRS's radar.

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4. Data Validation & Reporting Excellence – The Future of Corporate Responsibility

Segment Overview:

Field of Study:

Recommended Accreditation:Reading (Optional for Group Study):

Running Time:

Video Transcript:

Course Level:

Course Prerequisites:

Advance Preparation:

Expiration Date:

Accounting

December 12, 2021

Work experience in financial reporting or accounting, or an introductory course in accounting.

None

1 hour group live 2 hours self-study online

Update

“As ESG accreditation evolves, don’t forget the Principles for Responsible Investment”

“What registered investment advisers can expect from the SEC in a changed economy”

“As private equity firms hold onto investments, investors get restless”

By Anthony DeCandido

“Technology to improve ESG disclosure”

By Anoop Khanna

See page 4–12.

See page 4–20.

35 minutes

Environmental, social and governance (ESG) criteria may not be a new set of standards but it is gaining more and more ground amongst private equity companies and investors as it helps screen potential investments. Modern investors reevaluate and challenge traditional investment approaches as the global environment evolves and becomes more complex. ESG criteria assess a company’s values and behaviors and help investors see if these values match their own. Anthony DeCandido, financial services partner and senior financial services analyst for RSM US LLP, discusses the ESG criteria in further detail and its objectives.

Learning Objectives:

Upon successful completion of this segment, you should be able to: l Recognize how the modern investors evaluate investment

opportunities, l Identify the various boards and initiatives related to ESG and

understand the differences and similarities, l Recognize the best practices for ESG reporting, and l Identify what executives need to know and what they need to

avoid.

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A. Why Evaluate ESG?

i. Prosocial behaviors drive better results

ii. Influencers can be associated with your organization

iii. Consumers are interested in l Why an organization exists l What organizations do to conduct

business

B. Dodd-Frank Act

i. Created a high level of transparency for investors

C. Challenges in the Market Today

i. Absence of a universally accepted framework l Prevents companies from

conforming to societal or business changes

D. Reasons to Establish ESG Criteria

i. Peer pressure or trend

ii. Change in demographics – millennials are l Mission based l Aligning beliefs and value

systems to organizations they associate with

iii. ESG is here to stay

E. Non-ESG Believers

i. Drive high financial return

ii. Give most of that money to a cause

II. Transparency and External Pressures

A. The Modern Investor

i. Reevaluates and challenges traditional investment approaches as the global environment evolves

ii. Looks for higher standards of reporting

B. SEC Disclosure Framework for ESG

i. Seeks to provide investors with l Material l Comparable l Consistent information

C. Investors’ Class Prosocial Behavior Drivers

i. Environments they operate in

ii. Social causes

iii. Governance topics

D. ESG Breakdown

i. Environmental l Being good stewards to the

environment

ii. Social l How we are treating employees,

customers, suppliers l Diversity and inclusion

iii. Governance l Executive level compensation l Board composition

I. ESG and the Modern Investor Perspective

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A. Sustainability Accounting Standards Board

i. Enables businesses to l Identify l Manage l Communicate l Financially material sustainability

information to investors

ii. Has developed a complete set of 77 industry standards

iii. Provides guidance

iv. Has identified issues considered financially material

B. Global Reporting Initiative

i. Helps businesses and governments worldwide understand and communicate their impact l On critical sustainability issues

ii. Empowers decisions that create social, environmental and economic benefits for everyone

iii. GRI standards focus on an organization’s material topics

C. Goals of SASB & GRI Collaboration

i. Provide clarity in ESG reporting

ii. Help investors & consumers understand similarities & differences between the two sets of standards

D. Task Force on Climate-Related Financial Disclosures

i. Focuses on developing voluntary, consistent climate-related financial disclosures

ii. Asks organizations to report on four categories: l Governance l Strategy l Risk management l Metrics & targets

III. ESG Boards, Initiatives and Taskforces

A. Available ESG Standards – Codes

i. SASB – 77 sets of standards

ii. SDG – 17 codes

B. Best Practices for ESG Reporting

i. Align ESG metrics to your missions & values

ii. Develop policies & procedures

iii. Develop levels of governance

C. Understanding Your End Stakeholders

i. Public Companies l Stakeholders & investors

ii. Private Investment Company l Investors l Talent you wish to attract l Vendors you align yourself with l Marketing professionals l Anything & anyone

IV. ESG Reporting

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A. Survey Findings Included

i. Written objectives & performance metrics for stakeholders l More likely to exist at larger

companies

ii. Only 39% of executives are familiar with ESG criteria l Same percentage in 2018

B. What Executives Need to Know

i. They are not alone l Their peers have the same

questions and concerns

ii. There are people to assist along the way

iii. Determine if they need to buy or build when they start their journey

C. What Executives Need to Avoid

i. Greenwashing

ii. False advertising – do what you say you are doing

iii. Bad actors – know who you are doing business with

VI. Executive Roles and Key Things to Remember

A. ESG Values & Behaviors

i. Give a sense of purpose

B. How RSM U.S. Adds Value to Their Clients

i. Employing data scientists who l Organize clients’ data l Create insights & predictions

ii. Benchmarking l Measuring information against

peers

iii. Assisting with reporting

C. Steps RSM U.S. Takes with ESG

i. Gives priority to l People l Diversity inclusion

ii. Minimizes their carbon footprint

V. Establishing ESG Criteria and Adding Value

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A. Ways to Avoid Picking & Choosing Metrics

i. Showcasing the journey l Helps improve business practices

ii. Remediation l Helps respond appropriately to

failed results

“It doesn't have to be depicted as a terrible thing. It could be depicted as something that allows for business improvement.”

— Anthony DeCandido

B. Anthony DeCandido’s Views on Outliers

i. Opportunity to learn something unique about a company

ii. Provide insights

iii. Help understand the nature of those transactions

C. Impact of ESG Reporting Templates

i. Improve education and awareness

ii. Can create confusion l Customizing framework can be

daunting

D. ESG & Value Creation

i. It can lead to improved business results

ii. No empirical data to support that ESG drives better financial results

“… this is going to be centered around data and the ability to benchmark because … if you're not able to benchmark the impact that you're having, then why bother in the first place?”

— Anthony DeCandido

VII. Leveraging ESG Metrics and Reporting

4–6

l As the Discussion Leader, you should introduce this video segment with words similar to the following:

“In this segment, Anthony DeCandido discusses environmental, social and governance (ESG) criteria in detail and looks at its objectives."

l Show Segment 4. The transcript of this video starts on page 4–20 of this guide.

l After playing the video, use the questions provided or ones you have developed to generate discussion. The answers to our discussion questions are on pages 4–8 and 4–9. Additional objective questions are on pages 4–10 and 4–11.

l After the discussion, complete the evaluation form on page A–1.

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4. Data Validation & Reporting Excellence – The Future of Corporate Responsibility

1. How does the modern investor evaluate investment opportunities? What new criteria have you noticed are important to today’s investor?

2. What are the ESG criteria and why is it important for companies to evaluate ESG? How is your organization evaluating its ESG data?

3. What are the reasons an organization should establish ESG criteria? Why or why hasn’t your organization established ESG criteria?

4. What are the initiatives of various boards related to ESG?

5. What are the best practices for ESG reporting? Who is your organization’s end stakeholder?

6. What are Mr. DeCandido’s views on what executives need to know and what they need to avoid? How successful has your organization been at initiating ESG objectives?

Discussion Questions

You may want to assign these discussion questions to individual participants before viewing the video segment.

Instructions for Segment

Group Live Option

For additional information concerning CPE requirements, see page vi of this guide.

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7. What are some ways to avoid managers picking and choosing metrics that will manipulate data results? How can you handle outliers?

Discussion Questions (continued)

4–84–8Suggested Answers to Discussion Questions4. Data Validation & Reporting Excellence –

The Future of Corporate Responsibility1. How does the modern investor evaluate

investment opportunities? What new criteria have you noticed are important to today’s investor? l They reevaluate and challenge

traditional investment approaches as the global environment evolves and becomes more complex

l They look for higher standards of reporting

l They drive prosocial behaviors as it relates to: v Environments in which they

operate v Social causes v Governance topics

l Participant response based on personal/organizational experience

2. What are the ESG criteria and why is it important for companies to evaluate ESG? How is your organization evaluating its ESG data? l Environmental

v Being good stewards in the environments in which we operate

v Examples – water usage, emissions, carbon footprint

l Social v How we treat our employees,

customers, and suppliers v How we organize as far as

diversity and inclusion l Governance

v Executive level compensation v Board composition

l ESG should be evaluated because: v Prosocial behaviors drive better

results v Influencers can be associated with

your organization v Consumers are interested in:

k Why an organization exists k What organizations do to

conduct business l Participant response based on

personal/organizational experience

3. What are the reasons an organization should establish ESG criteria? Why or why hasn’t your organization established ESG criteria? l Peer pressure l Trends l Primary reason is the change in

demographics because millennials are: v Mission-based v Aligning beliefs and value

systems to organizations with which they associate

v Increasingly influential with their investor base

l ESG is here to stay l Participant response based on

personal/organizational experience

4. What are the initiatives of various boards related to ESG? l Sustainability Accounting Standards

Board (SASB) v An independent standards board

that is accountable for due process, outcomes, and ratification of the SASB standards

v Enables businesses to identify, manage, and communicate financially material sustainability information to investors

v Developed a complete set of 77 industry standards available on their website

v Provides guidance v Identifies issues considered

financially material l Global Reporting Initiative (GRI)

v Helps businesses and governments worldwide understand and communicate their impact on critical sustainability issues v Such as climate change, human

rights, governance and social well-being

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4–9Suggested Answers to Discussion Questions (continued)v Mission is to empower decisions

that create social, environmental, and economic benefits for everyone

v Standards represent global best practices that also focus on an organization’s material topics and related impacts

l SASB & GRI collaboration v Provide clarity in ESG reporting v Help investors and consumers

understand similarities and differences between the two sets of standards

l Task Force on Climate-Related Financial Disclosures (TCFD) v Established by the Financial

Stability Board (FSB) v Focuses on developing voluntary,

consistent climate-related financial disclosures

v Asks organizations to report on four categories related to climate change: k Governance k Strategy k Risk management k Metrics and targets

l Recommends that companies develop a climate scenario analysis testing the resilience of their strategies

5. What are the best practices for ESG reporting? Who is your organization’s end stakeholder? l Align ESG metrics to your missions

and values l Develop policies and procedures l Develop levels of governance l Determine KPIs that are unique and

relevant to the particular business and industry

l Understand who is your end stakeholder v Investor v Talent you wish to attract v Vendors that you align with v Marketing professionals v Anyone else

l Participant response based on personal/organizational experience

6. What are Mr. DeCandido’s views on what executives need to know and what they need to avoid? How successful has your organization been at initiating ESG objectives? l Executives need to know

v They are not alone – peers have the same questions and concerns

v There are people to assist along the way

v Whether they need to buy or build when they start their journey k Buy meaning aligning with

reputable consultant k Build if existing team has time

and level of sophistication l Executives need to avoid

v Greenwashing v False advertising – do what you

say you are doing v Bad actors – know who you are

doing business with l Participant response based on

personal/organizational experience

7. What are some ways to avoid managers picking and choosing metrics that will manipulate data results? How can you handle outliers? l Ways to avoid picking and choosing

metrics v Showcasing the journey

k Understand that we aren’t perfect

k Opportunity to improve business practices

v Remediation k Helps respond appropriately to

failed results k Have an appropriate response

that they can communicate to the market

l Handling outliers v Opportunity to learn something

unique about a company v Provide insights v Help understand the nature of

those transactions

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1. The SEC rule of thumb requires companies to restate prior period financial statements in the event of an error that has an impact of 5% or more on:

a) earnings

b) assets

c) equity

d) cash flows

2. Earnings management:

a) is NOT considered financial statement fraud

b) is typically performed by non-management personnel

c) exists partly because of the flexibility allowed in generally accepted accounting principles

d) is currently NOT a priority for the Securities and Exchange Commission

3. Marvell Entertainment was recently fined for:

a) pulling revenues from future into present quarters only

b) failing to pulling in offsetting expenses only

c) both A and B

d) obstructing an SEC investigation

4. Which of the following lines of communication is considered necessary to prevent earnings management?

a) communication between the financial professionals and senior executives only

b) communication between the company and its outside auditors only

c) communication between the outside auditors and audit committee only

d) all of the above lines of communication are considered necessary to prevent earnings management

5. Which of the following is NOT a reason given that the PCAOB should NOT conduct public company audits?

a) lack of qualified professionals

b) lack of resources

c) the need to maintain independence

d) the PCAOB should NOT be involved in the audit process

6. The new rules related to Critical Audit Matters (CAMs) are effective for large accelerated filers:

a) after January 1, 2019

b) after January 1, 2020

c) after December 15, 2020

d) after June 30, 2019

7. With respect to the whistleblower provisions under the Dodd-Frank Act:

a) individuals are no longer allowed to collect whistleblower awards

b) the Act requires arbitration of whistleblower claims

c) the Act allows retaliation by employers against whistleblowers in certain circumstances

d) whistleblowers' identities are NOT protected under the Act

8. As a result of the implementation of ASU 2018-15, companies should now consider which of the following considerations related to their transactions and agreements?

a) Accounting implications of a particular transaction

b) SEC implications

c) Tax implications

d) all of the above

You may want to use these objective questions to test knowledge and/or to generate further discussion; these questions are only for group live purposes. Most of these questions are based on the video segment, a few may be based on the reading for self-study that starts on page 4–13.

4. Data Validation & Reporting Excellence – The Future of Corporate Responsibility

Objective Questions4–104–10

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9. Earnings management encompasses:

a) both accounting earnings management and real earnings management

b) accounting earnings management only

c) real earnings management only

d) asset misappropriations

10. One of the reasons that the validity of the current system of utilizing independent accounting firms to audit public companies is being called into question is:

a) the increase in audit fees

b) the lack of qualified audit professionals in independent firms

c) the inability of independent audit forms to obtain cooperation from their audit clients

d) the significant increase in accounting earnings management related actions brought by the SEC

Objective Questions (continued)

4–12

Self-Study Option

Reading (Optional for Group Study)

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AS ESG ACCREDITATION EVOLVES, DON’T FORGET THE PRINCIPLES FOR RESPONSIBLE INVESTMENT

FEB. 11, 2020 BY ANTHONY DECANDIDO Source: https://realeconomy.rsmus.com/as-esg-accreditation-evolves-dont-forget-the-principles-for-responsible-investment/

As socially responsible investing has grown in recent years, so too have the number of organizations looking to create some sort of accreditation for investors.

Groups like the Sustainable Accounting Standards Board, the Global Reporting Initiative and CDP Global are looking for ways to provide a sort of Good Housekeeping Seal of Approval that reassures investors their money is being put to work in a way that they intend.

One of the oldest, and most established, of these is the Principles for Responsible Investment, a United Nations-backed effort that demonstrates an organization’s commitment to responsible investment practices.

Established in 2006, PRI has grown to have nearly 2,500 signatories including asset owners, asset managers and service providers. In all, they represent more than $80 trillion of assets under management, making PRI the largest form of accreditation in the sustainability sector.

Signing the principles is a way to demonstrate an organization’s commitment to responsible investment practices. It’s a chance to align one’s missions and values to those who receive, deploy or service capital. It’s also a sign of intent: Many sign the principles, or plan to sign them, because they aspire for a more sustainable organizational and global financial system.

Misconceptions But while the popularity of PRI is undeniable, many middle-market professionals still misunderstand its core tenets. There are several misconceptions:

The principles themselves are voluntary. Rather than PRI requiring certain practices

l In order to ensure adherence to NASBA guidelines regarding self-study, the CPA Report and CPA Report Government/Not-for-Profit Self-Study Professional Education Centers are no longer available. Customers should contact their company administrators for information on taking course exams and receiving CPE credit for the courses.

l Customers may contact Kaplan Financial Education at cpesupport@kaplan.com to obtain certificates previously earned through the CPA Report Self-Study and CPA Report Government/Not-for-Profit Self-Study Professional Education Centers.

l Customers interested in the self-study format of the CPA Report can find information on Kaplan Financial Education's self-study libraries at Online Accounting CPE Courses.

CPA Report Gov/Not-for-Profit Update

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surrounding responsible investing, PRI instead applies a framework for what an organization intends to do. Think of these rules as more aspirational than foundational. Organizations look to improve in areas like climate change, human rights, and board diversity and structure to drive better investment outcomes.

Many middle market organizations believe that they must already have responsible investment practices in place today, rather than to use the framework to improve responsible investment practices for the future. In reality, the PRI approach has attracted all kinds of organizations oriented to sustainability, both in the early stage or late stages of development. Just because a company doesn’t have a fully functioning responsible investment strategy doesn’t mean the company shouldn’t aim to achieve its principles.

For this reason, certain accommodations are made for first-year signatories. The first year of membership does not require reporting disclosures, meaning that most organizations formally report after 12 to 24 months of signing up with PRI. With the number of signatories increasing by approximately 25% from 2018 to 2019, it’s no surprise that the number of inquiries for reporting instruction, too, has increased. PRI’s solution – the Sustainable

Development Goals – articulates 17 such goals including poverty and hunger, education, clean water and energy, economic growth and industry and innovation.

Many of the PRI disclosures can be made private. Although signatories must report all information included within its framework, certain information can be held private, protecting those who do not yet demonstrate best-in-class responsible investing practices. PRI instead offers a platform to develop community with other like-minded organizations inside and outside an industry, to learn from one another, and to focus on the development of sound responsible investment practices. For those who are far more ambitious or who have best-in-class attributes, PRI offers the ability to benchmark among its PRI peers a valuable exercise for a committed PRI signatory.

PRI doesn’t independently validate the data it receives. The lack of data quality and inconsistency in its presentation is a major challenge for decision-makers. This creates a major void for investors to evaluate actual performance amongst peers. And worse, many people still are unclear on data terminology. r

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A whole new industry of accreditation has emerged, where asset managers and owners are requesting data validation to support their investment standing. Increased regulatory and stakeholder pressures and rising social and environmental concerns will continue to push organizations to adopt reporting practices. But the market will need certification no different from organizations that prepare financial information and seek independent audits.

A chance to evaluate progress

So while responsible investment reporting continues to evolve, PRI remains a notable option.

PRI offers the chance for investors to evaluate an organization’s responsible investment progress against an industry framework, benchmark the performance of public data, and then to summarize its activities for stakeholders.

Signatories report how they will incorporate ESG issues into investment analysis and decision-making processes, including the processes and controls that it will follow. Most important, they report activities and progress made by each principle.

In the end, this maintains accountability, standardized reporting transparency and regular feedback that help an organization learn and develop.

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WHAT REGISTERED INVESTMENT ADVISERS CAN EXPECT FROM THE SEC IN A CHANGED ECONOMY

JUN. 2, 2020 BY ANTHONY DECANDIDO SOURCE: https://realeconomy.rsmus.com/what-registered-investment-advisers-can-expect-from-the-sec-in-a-changed-economy/

Even as the coronavirus disrupts many conventions and traditions of the financial services industry, one regulatory ritual has continued, albeit in digital form: the Securities and Exchange Commission’s compliance examinations with registered investment advisers.

These examinations, which are now conducted virtually by the SEC’s Office of Compliance Inspections and Examinations, or OCIE, have highlighted some of the new risks faced by investment firms when it comes to compliance in an economy convulsed by the coronavirus.

A review of recent enforcement actions and OCIE exam priorities offers some insight into what areas of a business are most exposed, and what actions may ultimately protect the firm from investor or regulatory backlash for any issues of noncompliance.

Among the SEC’s questions: Are a firm’s holdings fairly valued, and is the firm able to meet redemption requests? Have pandemic policies been developed?

Many groups have prepared for what is the unavoidable call or email from the SEC. Some firms have upgraded or added talent to their back-office compliance function, while others have undertaken a mock examination. Nearly all have consulted with outside counsel.

We expect that the SEC will understand that advisers could require more time for a response as many managers are experiencing profound and unexpected business challenges amid the pandemic.

Regardless of the approach taken, here are some of the topics the SEC may consider during the health crisis:

l Are investment values reasonable and is there evidence of trading on nonpublic information? This should come as no surprise to investment advisers – valuation risk was always the

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top priority for OCIE, and the health crisis just makes it more important given the growing number of companies suffering financial losses. The current market environment heightens the risk that a general partner might overstate the firm’s investment values as a means of masking poor performance. Policies and procedures around a group’s valuation of securities are expected to be followed, especially amid volatile market pricing. Changing a set valuation policy without a supportable reason could alert the regulators of possible reporting fraud.This is particularly important when investment performance has suffered coronavirus-related losses or when the general partners intend to raise capital. And during the SEC’s late-May coronavirus call, regulatory officials cited the agency’s increased attention to “friendly broker quotes” or transactions among market “affiliates,” which may suggest investments have not been fairly valued.

With more firms struggling to perform in a difficult market and to raise assets, the SEC is on alert for brokers that may be incentivized to trade using nonpublic information. For example, looming facility or store re-openings, pending health patents and access to personal protective equipment supplies are especially important in light of the coronavirus. And the SEC even commented on its ability to monitor bad behavior in what has long been a favorite communication technique on Wall Street: the Bloomberg chat room.

l Will funds be able to meet redemption requests? The health crisis has spooked some investors, leaving them with a reduced appetite for risk. While governing documents detail internal fund policies around investor redemptions and restrictions, investment managers may be faced with widespread redemption requests as investment values decline.

And this could lead to a scenario where investors have little to no access to cash during a time when they may need it the most. Examiners will look for situations where investment managers have strayed from set redemption guidelines. Policies

around lock-up periods, side pocket arrangements and notice requirements are expected to be examined to protect investor interests.

l Have pandemic policies been developed? Long after COVID-19 is brought under control, the virus will remain a risk, particularly around weak health systems, in areas with high population density and poverty, and in communities with political instability. And the threat of another pandemic will leave a lasting sting to savvy investors who seek solid pandemic policies and procedures. Business continuity plans, market intelligence and alternative data, and IT infrastructure and cybersecurity may be prioritized.

These are all areas that mattered before the onset of the coronavirus but may now matter more. Many investors have added these questions to their investment criteria to assess firms’ blind spots and to determine whether their investment strategy is worth ascribing to. We believe the SEC will expect groups to carefully measure these risks and those that have already developed sound business practices will be positioned well. Issues will arise when there was no plan in place, the plan is outdated or no longer relevant, or, worse, when a good plan was not followed.

The takeaway At the end of the day, the SEC aims to ensure transparency and clear and consistent reporting. By putting in place institutional-quality processes throughout the organization, investment firms better ensure compliance with regulatory requirements.

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MAY. 27, 2020 BY ANTHONY DECANDIDO SOURCE: https://realeconomy.rsmus.com/as-private-equity-firms-hold-onto-investments-investors-get-restless/

The coronavirus pandemic hasn’t slowed interest by private equity firms putting their cash to work in distressed firms. Although deal activity was down from March to April, general partners in private equity firms are still searching for value wherever they can find it.

And they have the means to do it. After years of solid fundraising – which resulted in $316 billion of capital raised in 2019, according to PitchBook – private equity funds are overstocked with capital and are under pressure to put large amounts of money to work.

But as that stockpile has increased, threats of the coronavirus have continued to mount, creating uncertainty and leaving private equity firms in a holding pattern.

It’s creating a push and pull in a private equity market that has switched from what was unmistakably a seller’s market in 2019 and before, to a buyer’s market in early 2020.

At issue are the lower valuations of companies that are suffering COVID-related losses. Sending a lifeline now offers general partners the largest long-term financial

upside and helps drive the type of returns that their investment base mandates.

But at the same time, the lower valuations are making private equity firms more reluctant to sell the companies they do control as they wait for the market to recover. And in the near term, general partners will need to take steps to recession-proof and fortify business operations at the portfolio level. Addressing working capital will be an immediate priority.

The result has been a notable change in private equity holding periods and the number of investments to exits that general partners have made.

As of April, the median investment holding period was 5.43 years, a 9% increase from 2019, and the highest reading since 2014, when the median holding period was 6.16 years. An increased reading implies an unwillingness of general partners to exit investment holdings while a decreased reading suggests a willingness to exit investment holdings.

From 2015 to 2018, a bull economy had private equity firms exiting positions more quickly, with holding periods ranging from 5.10 to 5.24 years, compared to 2012 to 2014, when those ranges were 5.36 to 6.16 years.

As holding periods have increased during the coronavirus…

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AS PRIVATE EQUITY FIRMS HOLD ONTO INVESTMENTS, INVESTORS GET RESTLESS

Source: PitchBook

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This implies that private equity firms with set three- to five-year holding periods dictated by their partnership agreements held onto their investments longer following the Great Recession, but sought swifter exits as the economy recovered and valuations increased.

But the recent reading hints at general partners’ fading confidence to strike favorable exit terms. General partners are instead seeing the value of holding onto quality companies for as long as is needed to create maximum upside for fund performance.

This dynamic is reflected in another measurement used in tracking changes in general partner investment sentiment – known as private equity investment-to-exit ratios – that further demonstrates the ill effects of the health crisis.

From January to April, 1,231 investments were made, with only 238 exits realized, representing an implied ratio of 5.2x, the highest such reading over the past 10 years. What’s more, 283 investments were made and only 42 investment exits took place during March, or an implied ratio of 6.7x, compared to a reading of 4.7x in January and February, respectively.

… the investment-to-exit ratio has also risen

This suggests that general partners were more willing to put money on the table for companies with a perceived upside versus taking money off the table for companies that had not yet realized their investment potential.

Again, general partners observed fewer favorable exits and instead focused on their current portfolio of companies that required active management to slow COVID-related losses. And as many buyout companies continue to struggle, general partners will continue to make strategic add-ons to salvage those deals that were already made rather than pursuing exits on companies that are enduring financial harm.

Key takeaways l General partners must remain focused on

their founding purpose – to generate long-term returns – but will contend with restless limited partners who increasingly request that capital be deployed. The general partners will seek answers to slowing short-term returns, just as investors have in public markets.

l General partners will need to work closely with their limited partners to renegotiate investment periods where needed to provide ample time to make measured investment decisions. The

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Source: PitchBook

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A new report has called for technology and unified regulatory guidelines to make ESG disclosure efficient and actionable.

By Anoop Khanna Source: EBSCO This article is for educational use only. Please do not use, distribute or share outside this course.

Publication in June 2020 of a new report ‘ESG in China: Current State and Challenges in Disclosures and Integration’ by Ping An Digital Economic Research Centre is a call for concerted efforts by all stakeholders to improve ESG disclosures for Chinese companies. Unified regulatory guidelines The new report recommends that all regulators, financial and nonfinancial, in the country should develop unified guidelines and come together on the most material indicators that companies must disclose about their ESG practices and policies.With a unified set of guidelines, it would be easier for companies to work on what information is most material to their shareholders and for credit ratings.

It is expected that the China Securities Regulatory Commission will make disclosure of sustainability information for China’s listed companies mandatory by the end of 2020. Chinese companies. Therefore, need support with ESG data and insights on a par with their global peers. The Hong

Kong stock exchange has already made disclosures on climate change and social issues mandatory from 2021. The new requirements will be binding on companies whose financial years begin on or after July 2020.

The report says that the country’s regulators and stock exchanges should build on guidelines and recommendations of international organisations such as the Global Reporting Initiative and the UNsupported Principles for Responsible Investment and integrate local market considerations specific to Chinese companies. “Regulators should also encourage companies to audit their ESG disclosures as ESG is an important complement to the governance of Chinese companies. Better ESG disclosures and performance can help improve the credibility and value of Chinese companies for global investors.”

Chinese corporates face significant challenges to meet stricter regulations and investor demands for high quality ESG disclosure. The ESG disclosure rates have, however, been improving.

The report says, “Even though ESG investing is still in its early stages in China, various investment managers have started expanding their ESG-themed research and financial products.”

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TECHNOLOGY TO IMPROVE ESG DISCLOSURE

pendulum will likely change with more limited partner-friendly terms and conditions observed, including reduced or customized management fee and incentive fee rates.

l General partners will need to consider possible recycling provisions in instances where limited partners are either unwilling or unable to finance capital commitments.

l And limited partners will increasingly seek help from secondary private equity funds that are nimble and can provide realizations quickly.

For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.

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Leverage technology

As most companies have no processes for collecting high quality ESG data, the report recommends that companies leverage technological solutions to collect, monitor and learn from their ESG data.

Instead of a manual process, it should be automated across departments. Ping An’s AI-ESG platform has mapped more than 500 indicators from different regulatory agencies and has helped it to automate data collection, monitor changes and generate actionable insights through industry peer comparison.

Ping An is today one of the first financial services companies globally to release its annual sustainability report this year. Investors get more demanding

The report says the investors should incorporate ESG information into their investment decisions, develop ESG investment tools, exert shareholder influence and encourage better ESG disclosures from Chinese companies.

Investors demand more information on the impact companies have on the environment, society, and their own risk management in order to make better informed decisions about where to invest and where they can use their influence to improve companies’ sustainable management practices.

The report suggests that investors implement ESG investing in three stages. Investment managers can start from simpler processes, such as negative and positive screening, by leveraging several mainstream ESG rating providers in the market.

Investors should deepen analysis and application of ESG indicators and the ratings framework, analyse the impact of ESG indicators on investment decisions and establish customised evaluation frameworks

consistent with the investors’ own investment styles.

Finally, they should fully integrate ESG factors into their own valuation models and develop targeted research on important ESG topics, such as climate change and demographic trends. Ratings agencies need to become more transparent

The report also says that rating agencies should improve transparency on their methodologies and expand their ESG data sources to include alternative data that is not reliant on company disclosure, to improve objectivity and timeliness.

Even though rating providers may not be able to disclose every detail of their methodologies due to intellectual property concerns, they could still be more transparent about their indicator scope and scoring framework.

China needs better information gathering, measuring and reporting processes for ESG disclosures. The report comes up with several proposals to address these challenges.

Copyright of Asia Insurance Review is the property of Ins Communications Pte Ltd and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.

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SURRAN: Environmental, social and governance (ESG) criteria may not be a new set of standards but it is gaining more and more ground amongst private equity companies and investors as it helps screen potential investments.

Modern investors reevaluate and challenge traditional investment approaches as the global environment evolves and becomes more complex.

If you had to pick one word to define ESG, it would be 'data'. But where is data coming from and how reliable and accurate is it? In publicly traded companies, investors can view public filings, go through the numbers and have comfort that they are not skewed. Privately held businesses, though, are under no obligation to provide such information.

But as investors are changing and looking for higher standards of reporting, data and data validation are evolving, and that is driving developments in ESG.

Sustainability disclosures under current SEC regulations and guidance are required only if "material"; in other words, if they significantly change the information available to investors. In the absence of a disclosure framework, they rely on third-party ESG data providers or disclosures.

In May 2020, the SEC recommended the creation of a disclosure framework for ESG investments that will provide investors the "material, comparable, consistent information they need to make the investment and voting decisions." However, if the SEC does not take the lead, on a global level, to mandate material ESG disclosures, U.S. issuers may have to follow standards imposed by other jurisdictions overseas that have imposed ESG standards.

In the meantime, Europe takes the lead on ESG disclosure standards for funds. The European Supervisory Authorities (ESAs) published a draft that provides key provisions of the Disclosure Regulation on ESG disclosures. The Disclosure Regulation will require financial market professionals (FMPs) and financial advisers (FAs) to provide investors with ESG information on certain financial products. That will enable investors to make informed decisions. The draft is an important step towards the finalization of the ESG disclosure rules and is important for firms that need to prepare to be ready by March 10, 2021, when it goes into effect. The ESAs expect stakeholders to comment on the draft by September 1, 2020.

FOSTER: Environmental, Social and Governance (ESG) criteria assess a company's values and behaviors and help investors see if these values match their own. Anthony DeCandido, financial services partner and senior financial services analyst for RSM US LLP is with us today and starts our segment by defining the ESG criteria and discussing its objectives.

DECANDIDO: ESG stands for Environmental, Social and Governance and ESG has become really important as of late because in particular the asset management field has received a number of allocations from the investor classes to drive prosocial behaviors as it relates to their environments that they operate in, social causes and governance topics.

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4. Data Validation & Reporting Excellence – The Future of Corporate Responsibility

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t If we drill down a bit further, you think about the environment, it's this concept of being good stewards in the environments that we operate in. It could be simple things like water usage or emissions or carbon footprint.

When you think about it socially, it can include how we treat our employees and our customers. What's their level of engagement? When you go up and down the supply chain, it could be any suppliers that we work with. How do we organize as it relates to diversity and inclusion?

And then we think about governance, it's matters like executive level compensation, it's governance, it's board composition and so on and so forth. These are the three prevailing topics within ESG that have caught a lot of interest as of late.

FOSTER: Anthony discusses why ESG is important for companies to evaluate.

DECANDIDO: Most organizations still evaluate behaviors based on ROI, right? There is this common belief in the market today that these prosocial behaviors actually drive better business results. That's one.

Another one is we're living in a world of many influencers now and people are very curious as to the types of organizations that they're associating with, whether they're working there or they're engaged from a contract or some type of agreement or it's an organization that operates in the community that they live in, and on and on and on.

It's imperative for these organizations today to stand for something and so many of the people in society today, they're as interested in why an organization exists as much as what they do to conduct business.

FOSTER: Every executive talks about transparency, but is there a difference when we talk about ESG and transparency?

DECANDIDO: I mean transparency is not a new topic. When you think back in the space that I covered, asset management, I mean there's been regulation that occurred in '12 Dodd-Frank, which created a high level of transparency for the investor base. This asset management space in particular has gotten a lot of interest from regulators and so in that theme there's this interest of being transparent as it relates to my ESG behaviors and stockholders are asking more questions on it. A lot of the investors are asking more questions on it.

One of the biggest challenges in the market today is what do I offer up to these stakeholders in light of the fact that there is no universally accepted framework? I think that's probably the biggest challenge that a lot of the clients that we work with face – wanting to conform to societal changes or business changes but at the same time doing so with a universally accepted framework and without that a lot of our clients, they're quite curious as to what they should be doing.

FOSTER: In the last few years more and more companies are associating themselves with a cause, supporting a philanthropic organization or a mission. But why now? Is it peer pressure, is it a trend or is there something with deeper roots that is here to stay?

DECANDIDO: I think that's part of the reason but the primary reason has been because of changing demographics. The year 2019 was the first year where the millennials surpassed the boomers as the highest percentage of the US workforce and this demographic is quite different from their predecessors. They are much more mission based so they're curious to align their beliefs and value systems to the organizations that they're associating with and so

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t for that reason, we don't see any reason to believe that ESG will go away anytime soon in terms of the interest level of it but that to me is the primary driver of all this is just changing demographics. I believe it's here to stay.

There's still this belief of some that they would say rather than adopt these ESG type practices, I instead want to drive the highest level of financial profile return, and then once I do so, then in turn return the most money to you, name the cause and so there still is this motive of some that they're not buying into it, but I think you're going to see that belief starting to fade out. I mean I made mention earlier like we live in this world of influencers, right?

People have greater levels of access to others who they aspire to be. Like, whether it's celebrities, whether it's business leaders, whether it's politicians or whomever and so when people do good, they're able to showcase that to the masses and I think most of us want to align ourselves in that same way too, to feel good about why we're doing what we're doing and to align ourselves with something that's mission based.

You have to be cognizant of the fact that millennials now will represent some of C-suite executives if not today in the near term, they're increasingly influential within their investor base. They can be the next wave of board leaders and on and on and on. You kind of get the point that as those individuals take greater levels of responsibility within the business community, I only see this trend increasing.

SURRAN: The Sustainability Accounting Standards Board (SASB) is an independent standards board that is accountable for due process, outcomes and ratification of the SASB standards.

It enables businesses around the world to identify, manage and communicate financially material sustainability information to their investors. SASB has developed a complete set of 77 industry standards that are available to download on their website.

SASB also provides guidance and has identified issues considered financially material, but in the end, it is a company's decision to decide what is financially material to be disclosed.

On a global level, the Global Reporting Initiative (GRI) helps businesses and governments worldwide understand and communicate their impact on critical sustainability issues such as climate change, human rights, governance and social well- being. Its mission is to empower decisions that create social, environmental and economic benefits for everyone. The GRI standards represent global best practices that also focus on an organization's material topics and related impacts.

On July 12, 2020, the Sustainability Accounting Standards Board (SASB) announced a collaboration with the Global Reporting Initiative (GRI). This collaboration was prompted by an increased demand for clarity in ESG reporting and will also help investors and consumers better understand the similarities as well as differences between the two sets of standards.

According to Tim Mohin, Chief Executive of CRI,

"GRI and SASB share the guiding principle that transparency is the best currency for creating trust among organizations and their stakeholders. Investors, policy makers, civil society and other stakeholders are

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t demanding improved disclosure or information on sustainability impacts, including those likely to drive risk and opportunity in both the short and long term."

It is important to also mention the Task Force on Climate-related Financial Disclosures (TCFD) that was established in December, 2015, by the Financial Stability Board (FSB) in an effort to develop voluntary, consistent climate related financial disclosures for use by companies in providing information to lenders, insurers, investors and other stakeholders.

The TCFD's framework asks organizations to report on four categories related to climate change: governance, strategy, risk management and metrics and targets. It also recommends that companies develop a climate scenario analysis testing the resilience of their strategies.

FOSTER: ESG is growing in popularity but there has been no consensus from stakeholders on how to report. At the same time, there are opportunities for asset managers to improve their public profile at a time when social integrity is increasingly important.

DECANDIDO: The reporting concept is one that is a big challenge for middle market leaders today and the reason for that is because there is no universally accepted framework and so for most of those who are tasked with the responsibility, they come from financial backgrounds in most cases. They're accustomed to things like generally accepted accounting principles or GAAP or they're accustomed to IRS frameworks and so there's this level of comfort of having a framework which you can conform to. In this case there is no universally accepted one in the US there are frameworks that are suggested.

Several years back there was something put out called the Sustainable Accounting Standards Board or SASB. That got early interest because you know one of the major financial services leaders, Michael Bloomberg, who was a presidential candidate. He was one of the early board members and drivers of that initiative. What's neat about that one is that it's aligned to industry. If you're a company that doesn't associate with a prevailing industry categorization, you can conform to these niche industry themes in ESG.

DECANDIDO: There are 77 codes so that can sometimes feel overwhelming but it is one option for those who are ESG active. Another one which I prefer is called Principles of Responsible Investment SDGs or sustainable development goals and what's neat about that is there is no industry alignment to it so you can be a company from, you name the industry and there's only 17 codes. 17 is clearly far fewer than 77. It's a little bit more digestible, consumable, for those who are practicing ESG and some of the prevailing themes there are water, emissions, environmental impact; it could be children in poverty and so on and so forth.

When you think about a business, there's these prevailing themes that would apply to any of those organizations across industries.

That's pretty neat. As of late, there's been some new frameworks on carbon footprint. You don't have to travel too far to understand that carbon emissions are probably one of the most thematic of all political topics right now. You've got a lot of activists, people like Greta Thunberg who are really driving change in that way and so this is a new framework which is centered around carbon emissions and all that, required disclosures in that way.

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t What's interesting to see there is PRI, Principles for Responsible Investment, has now made it mandatory for those who are driving that framework to also be signatories to their organization and so you see this convergence in the market of larger frameworks with these niche topics coming together saying, "Hey, this is of highest priority to the market."

One of the things that we're following very closely is the TCFD and this is a new framework which is centered around environmental footprint, in particular carbon emissions. What's neat about it is one of these existing governing bodies, PRI is now mandating beginning in 2020 that all those carbon-related environmental disclosures now be coupled with some of their reporting that's required by their cause.

FOSTER: Anthony DeCandido discusses best practices for ESG reporting

DECANDIDO: The first thing we recommend to clients we work with is to align the ESG metrics to your missions and values. That's a pretty open-ended point.

Once that's set in stone, we help them develop policies and procedures, levels of governance and we determine what are those KPIs that are unique and relevant to that particular business in that particular industry and then from there, there are a lot of different options. I mean the reporting can be more mathematical an exercise. I see a lot of rating agencies that are now active with public businesses showcasing where those organizations rate in all these themes that we've discussed earlier.

I see a lot of organizations focus on sustainability reporting, which I personally like because it just feels a little bit more customized and unique to that particular business.

It takes a lot of different forms but we recommend to groups we work with is ultimately understanding who's your end stakeholder and that varies depending upon what type of organization is. Sometimes it's more obvious if you're a public business, it's your stakeholders and your investors. If you're a private investment company, which is the area of expertise that I possess, it could be your investors but it could be more than that. It could be the talent that you wish to attract. It could be the vendors that you align yourself with. It could be the marketing professionals, the professional service organizations, it could be anything and so that to me is really important to lay out before you commence that operation.

SURRAN: They say communication is the key to success. Strong ESG values and behaviors can help companies attract investors but also attract and retain employees. Giving a sense of purpose has never been more powerful than now. It is important for the public to know that companies support social, community and/or philanthropic causes. Even though some will argue that it is too early to establish ESG criteria, it is best to be proactive.

There is real value for businesses to strategically share their ESG practices as it identifies them as being "well positioned for the future." And how should they share? The easiest and lowest cost way is through social media.

In this day and age, social media has true power, and that power is influence and it's instantaneous. Companies can also update their website, communicate their achievements via public relations and advertising, issue press releases, include their philosophy in their annual reports or itemize their social responsibility efforts in publicly released social responsibility reports.

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t FOSTER: When it comes to social responsibility, there are several vehicles that companies can use to leverage their achievements and progress. Anthony elaborates.

DECANDIDO: That also will vary depending on the level of sophistication of the middle market business that we're working with but some of the most common are press releases. It could be websites, it could be stakeholder investor reporting, it could be social media. Social media has a heavy, heavy impact.

When I think about groups that I'm meeting with, that's probably one of the first places I start. You know, who are they on LinkedIn? What are their interests, what type of organizations do they follow? There's just this mass of different communication methods that we would work with but understand middle-market, they oftentimes lack the financial resources and even the people resources to drive those communication strategies so they don't benefit from working from an 11,000-person firm with a robust unit that only focuses on press or communication. They have to get a little bit more creative and you find a lot of these professionals wearing a number of different hats to try to drive that change.

We now have the ability to monitor climate by drones and if you think about agriculture, right? How is next year's crop to do predictive analysis? There's just an abundance of available data that many times the middle market struggles to one retrieve but then to organize and then third to analyze and report, and so that to me is probably one of the biggest shortcomings of being a middle market business today because if you were a public business, a lot of the information you produce in your public filers would filter up through and you would be able to work with a rating agency, like Sustain analytics who's owned by Morningstar to determine what your standing is and you named the ESG measurement. It's a little bit different.

Professionals in all different markets right now, trying to solve this problem that we're talking about. You don't necessarily need to be a professional services firm like we are to try to solve this problem.

You can be a technology firm, you can be a media business. You mentioned you were on the phone with this group yesterday. I was on the phone with a different group and they were trying to solve a very simple part of the food chain in ESG. It was simply the data being collected. We're not a technology firm but we want to assist the consultant or public accounting firm or service provider in presenting these ESG measurements and I thought, okay, brilliant in the way that they're able to do this but okay, it's only just a segment of that problem that we're trying to solve but Hey, look, these groups are making an honest living doing it and so that just is further proof of how large this ESG market has become.

FOSTER: Anthony discusses how RSM U.S. adds value for their clients ESG and steps they take as a firm with respect to ESG.

DECANDIDO: The clients that we work with today, they're most interested in, "Hey, I have this problem, I can't organize my data. One of the neat things we have at the firm is we have individuals who are data scientists and data experts and so they've performed many projects where they've organized clients' data, created insights through it, more predictions and a more thoughtful insights and then the second one is really benchmarking. Now we have this information but how do we measure up against our peers?

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tAnd that's a big, big challenge with private companies in the middle market and then many times they also lack that infrastructure to do their own reporting. There are many different entry points for us within that cycle that we could assist clients with.

When we think about our own business as a professional services organization, one of the highest priorities for us is our people. How do we treat them? What's their level of engagement? Are we providing regular continuing professional education? Is it an organization that's composed of individuals that look like and behave like our clients and the community that we operate in?

We're really big on diversity inclusion but especially on the "I", diversity inclusion, which is the inclusion. It's not a matter of, "Hey, did we bring those right people in the organization but it's more about, okay, now they're here but what are we doing to make sure that they feel comfortable in the organization". Another part you could imagine is a lot of our senior level individuals that are out in the field serving clients, they're traveling by a lot of different means most often by plane.

We're very thoughtful also about our carbon footprint and how can we reduce that? We're an organization that has really embraced technology so we have all these different mediums for us to engage with one another but then are we really holding ourselves accountable to drive that change?

For instance, if you and I have a meeting that we can do remotely by web conference, are we actually doing that? Are we instead flying out to New York City to meet with you to host that meeting? Right? There're all these very simple examples of how we evaluate our business and then I think the other most obvious, which is easy for the generation I grew up in is, yeah, what are we doing for just compost and recycling and that sort of thing. My parents' age are people who you ask them, they would say, "Yeah, it's important."

But do they behave like it's important, maybe, maybe not and so that's sort of the rift for us organizationally is a lot of it comes with education and awareness and even training to ensure that people are putting their money where their mouth is. And oh, by the way, it should be able to prove for our organization that there is a return on investment. We're doing a light spend to put all these things together but we do expect in return that there's going to be some financial benefit to all this. It should really satisfy two objectives: doing something good and also financial.

SURRAN: RSM U.S. LLP and the U.S. Chamber of Commerce recently announced results from its RSM U.S. Middle Market Business Index (MMBI) Environmental, Social and Governance (ESG) special report.

It is a first-of-its-kind middle market economic index developed by RSM in collaboration with Moody's Analytics. RSM asked middle market executives 20 questions relating to changes in various measures of their business, the economy and outlook, including but not limited to:

l Pressure businesses feel to pay more attention to the way they operate, especially when it comes to their practices regarding environmental, social and governance issues, or ESG.

l Redefining the purpose of a corporation from simply making profits for shareholders to benefiting multiple stakeholders – customers, employees, suppliers, communities and shareholders

Some of the survey findings include:

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t l Executives of middle market companies reported that they now have written objectives and performance metrics for stakeholders

l Larger middle market companies with $50 million to $1 billion in annual revenue were more likely to have written objectives and performance metrics than smaller middle market companies, with $10 million to $50 million in annual revenue.

l Just 39% of executives are familiar with ESG criteria to evaluate the performance of organizations, which was the same percentage as in RSM's 2018 survey.

According to Anthony DeCandido,

"there's a notable rift between large companies and their smaller middle market counterparts. Smaller companies don't yet feel the pressure to follow the broader push for corporate social responsibility, while larger businesses are more likely to be held accountable by stakeholders and typically have better resources in place to conduct a deeper level of analysis. We'll continue to see this trend evolve as the demand for transparency increases and companies face greater regulatory pressure both in the U.S. and globally."

FOSTER: Anthony DeCandido gives us his views as to what executives need to know and what they need to avoid.

DECANDIDO: Sure. If you're a middle market business leader today watching this, I would say that if you are thinking about ESG one, you're like your peers. If you're confused as to how you should begin you're also like your peers, if you have aspirations of having something robust that you can feel proud of, there's people that are available to assist you but when you start that journey, the first thing you want to determine is do I want to buy or build it? Buy meaning you can align yourself with a number of the reputable consultants in the market today that can help you with that lift but you also need to evaluate what's the level of expertise of my team. Do they one, have the time resource available? And two, do they have the level of sophistication to handle this? And that's a decision that's going to be very personal and unique to accompany but there's a lot of different ways to handle it.

What do they need to avoid? I think there's this term in industry called greenwashing, which is essentially saying you're doing something prosocial but it's really not. Understand also that there are some bad actors in space so, if you're an asset management business at the early stage of your life cycle and you're trying to generate more capital inflows and you want to drive interest in your business, it's a way to market yourself better.

Understand that there's people that are saying they're doing things because there's a benefit to them but maybe they are, maybe they're not and I think you want to avoid doing things that could actually in fact have a long-term negative effect on you by saying you're doing something that you're not. That to me would be a big problem.

FOSTER: Asset managers have a plethora of data that can be used to accumulate useful information. But is all data good data and can it be incorporated into an ESG strategy?

DECANDIDO: If you're a public investment company, it's a bit easier because some of the technologies exist that allow those companies to sift some of the financial and even non-financial information up through the filings to that organization.

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t The challenge becomes when you're a private asset management business, there's a lack of good data. One of the things we do offer is we have this new social and environmental impact methodology tool that we use to assist those organizations with pulling that information together so they could then measure. That is probably one of the most pervasive challenges of middle market companies today is accumulating their data, they just don't know where to start and so many times you have this scenario where you have decentralized business units that are on different systems and have different data policies and practices and so sometimes that convergence exercise is really challenging.

Many times, these large middle market businesses we work with, a lot of times they just want to start from scratch. They kind of throw out some of the old and start from new and so they have a little bit more of an enterprise look as to how they do things that way.

FOSTER: Anthony DeCandido discusses ways to avoid managers picking and choosing metrics that will manipulate data results and how to handle outliers.

DECANDIDO: The results are probably one of the biggest issues because how do you feel if you produce results that you're not proud of? To me there's a few different ways of looking at, one is to say, okay, we're on this journey.

Like we understand that today we're not perfect and so this piece of data suggests to us that we have an opportunity to improve a business practice. Maybe you know, the following year and the following year after that you can show the improvement of that issue. That's one thing that is showcasing the journey.

The other thing is just basic remediation. I think if an organization is really thoughtful of their ESG practices, they're going to want to know where they're failing and they're going to want to have an appropriate response that they can communicate to the market. It doesn't have to be depicted as a terrible thing. It could be depicted as something that allows for business improvement.

An outlier is an opportunity to learn something unique and different about a particular company. I mean, our data scientists would look at the standard deviations of some of the data points from one another and so that would all be thematic in the way in which we provide our insights but yeah, I think outliers, we'd want to really investigate them to understand what's the spirit of that transaction, what occurred, who was associated with it and so on and so forth because it could hold some merits.

FOSTER: There are several organizations out there providing ESG reporting templates. Anthony discusses the impact they are having on standardization or validation of measurements.

DECANDIDO: There's two impacts. One, I think is it's improving the level of education and awareness of organizations who have ESG as a priority.

That's all positive. There's this idea that, "Hey, what I can't measure, I can't evaluate, right?" Someone we work with, he uses this great term. He says, "In God we trust but everyone else, bring data." That's a really interesting thought because it's true. I mean, how many times in the market today, you hear people talk about anecdotal evidence and we believe we're doing this, well, what's the proof of it? I think there are merits in that.

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t The challenge with it is it's also creating a lot of confusion. If you're a business in a respected industry without that framework which you can follow, it's really up to you to customize it and so for some that may be daunting and so that's where we're able to really assist these clients is trying to narrow that focus and provide some more reporting frameworks.

FOSTER: Is there a tangible link between ESG and value creation? And, if so, how can it be measured? Anthony gives us his views.

DECANDIDO: That's the million-dollar question. There have been a lot of academic thinkers who have put together projects and are in support of the fact that yes it does lead to improved business results.

There are others that suggest the opposite. We see a lot of survey results from all the professional service organizations. A lot of the technology companies, some of the ESG fund, survey data is pretty limited in empirical data. For example, if you surveyed 400 people and you phrase questions a certain way, well then it may lead to a particular response.

The truth is there's really no empirical data to support that ESG behaviors do in fact drive better financial returns. I think we all want to believe they do but they don't always and so I think a lot of it is following the theme of that particular fund because above and beyond financial returns is nonfinancial.

For example, we can say we did all these things, we invested all this money and oh, by the way, our employees and customers are more engaged or oh, we did all these things and we spent all this money and by the way, we believe our business is set for the future and we're more sustainable. Instead of being in business for the next 5 years, we're going to be in business for the next 50 years. There are all these different nonfinancial ways to justify the cost. It goes back to the previous conversations you and I have had, which is what are the missions and values of that organization? And so long as there's alignment between what we're doing and what the outcome is, then I think all of this makes perfect sense.

FOSTER: In the beginning of the segment, we defined ESG as Environmental, Social and Governance. But does one criterion carry more weight that the other and if so why?

DECANDIDO: Yeah. I think they're all important but I do think the environmental topics are much more relevant today than some of the others. Social ESG impacts have been well documented. There's a lot of publicity on them, whether it's nightly news, some of the publications we all read social media.

I don't think there is the same level of educational awareness in the environment yet and I referenced some basic examples earlier. There are some very intelligent, educated people who still don't understand how their behaviors drive poor environmental issues and so a lot of the companies we've worked with, we just met with a group that is a shipping business for natural gas. That's an organization that's so rooted in their environment but they're actually quite unique relative to most of the other companies that we work with.

Carbon emissions, water safety, occupational safety, all those kinds of things are really, really important to the environments that we operate in. I would say that it's the E in ESG.

FOSTER: Anthony DeCandido ends our segment by leaving us with his final thoughts.

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t DECANDIDO: I would say that many people are thinking about ESG today. Most people don't quite have a well-articulated vision or strategy around ESG and that's the primary reason why there's a lot of chatter about it. There's a lot of interest in it because people are saying it's of a high priority but they're not actually organized to address what they're saying is a priority. I do expect in the coming months and even years there's going to be a lot more organization around this business topic.

I think we will see a solution on the framework issue that we spoke about earlier with having some universally accepted framework. You may even see some regulatory releases of how companies should organize or report but I also think the evolution of this is going to be centered around data and the ability to benchmark because to me and the groups that we've met with, if you're not able to benchmark the impact that you're having, then why bother in the first place? Those to me, would be some of the developments I would expect to see in the next few years.

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A. By Citation

Accounting Standards Update – see: ASU

ASU No. 2014-09 June – 2

ASU No. 2016-02 June – 2

ASU No. 2017-02 October – 1

ASU 2018-08 July – 2

Digital Realty Trust v. Somers November – 4

FASB or Financial Accounting Standards Board – see: ASU

IRS IR-2019-182 January – 1

IRS Notice 2018-70 November – 1

IRS Notice 2020-29 July – 4

IRS Notice 2020-50 August – 3

IRS Notice 2020-51 August – 3

IRS PLR 201901003 April – 1

IRS Rev. Proc 2019-38(1) November – 3

IRS Rev. Proc 2019-43 January – 1

IRS Rev. Proc. 2020-20 June – 3

IRS Rev. Proc. 2020-23 October – 4

IRS TD 9875 November – 3

Ivison v. IRS June – 4

Norman v. United States February – 3

Public Law 86-272 December – 1

Public Law 115-123 November – 3

Public Law 115-97 November – 3

Simmons v. United States June – 4

South Dakota v. Wayfair December – 1

SSARS No. 21 January – 2

SSARS No. 24 January – 3

Statement on Standards for Accounting & Review Services – see: SSARS

Tax Cuts and Jobs Act, impact on individuals of December – 3

Tibble v. Edison August – 4

B. By Topic

AICPA Peer Review Program April – 1

Annuity types and requirements February – 3

Apportionment, state revenues and November – 1

Apportionment of income, considerations for November – 1

Index

Note: At the request of several subscribers, this Index reflects the most recent 11 months of CPAR programming rather than the current calendar year.

November 2019 – October 2020

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ASC Topic 606, implementation of Jan. – 4; July – 2

ASC Topic 606, PPP loans and July – 2

ASC Topic 718 August – 1

ASC Topic 842, implementation of Dec. – 2; Jan. – 4; July – 2

ASC Topic 842, pandemic and October – 1

Auditing standards, complexity of April – 1

Auditing standards, scalability of April – 1

Auditor's report, revised May – 4

Audit quality, PCAOB and February – 2

Automobile depreciation September – 3

Blockchain, accounting and February – 4

Blockchain, types of February – 4

Bonus depreciation, IRS special rule on May – 3

Bankruptcy, COVID-19 and September – 1

Businesses, effect of COVID-19 on September – 2

Business Interest Expense Limitation, IRC Sec. 163(j) May – 3

CAM, PCAOB guidance on Nov. – 4; Dec. – 2; Feb – 2

CAMs, auditor independence and

CAMs, inventory observation challenges October – 2

CARES Act May 1; May – 2; June – 3; June – 4

CARES Act and NOLs June – 4

CARES Act, charitable contribution deductions and July – 4

CECL model for loan losses December – 2

Chapter 11 September – 1

Chief Accountant, SEC Office of January – 4

Committee on Corporate Reporting December – 2

Compilation engagement, preparation vs. January -3

Conservation easements, tax benefits and dangers of January – 1

COVID-19, challenges companies face due to May – 2; Aug. – 1; Sept. – 2

COVID-19, economy and August – 1

COVID-19, FATCA and June – 3

COVID-19, IAASB Audit Implications of July 1

Critical audit matters – see: CAM

Cryptocurrency, guidance for December – 3

Current expected credit loss model – see: CECL

Debt Instruments, significant modifications of October – 4

Depreciation, IRS Sec. 704(c) and May – 3

Digital assets, AICPA and February – 4

Dirty Dozen Tax Scams and COVID-19 September – 3

Disaster relief, tax law provisions and Nov. – 3; Feb. – 1

Disclosure effectiveness, improving April – 4

Distributions & loans, CARES Act August – 3

Dodd-Frank Act, transparency and October – 4

Dodd-Frank Act, whistleblower complaints and September – 4

Earnings management, reasons to perform September – 4

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Economy, COVID-19 and May – 1

Elder Care, CPAs role in July – 3

Elderly, financial abuse of July – 3

Electronic Code, IESBA and June – 1

Electronic payments, risks involved with December – 4

Employee and employer donations, special August – 3

Employee vs. independent contractor, classification of December – 3

Ensuring Integrity, 14th Annual Audit Conference on April – 1

Enterprise blockchain, accounting challenges for February – 4

Entertainment and meal expense deductibility April – 2

Environmental, social and governance (ESG) issues October – 4

Estate planning, importance of April – 3; July – 3

Estate tax, proposed changes to April – 3

Ethical culture, components of November – 2

Ethical culture, maintaining November – 2

Ethics, tax planning and August – 2

Executive compensation, COVID-19 and Aug. – 1; Oct. – 2

Family Limited Partnerships April – 3

Federally Authorized Tax Practitioner (FATP) April – 2

Families First Coronavirus Response Act (FFCRA) May – 1; June – 4

Fiduciary litigation, key issues August – 4

Financial Accounting Standards Board (FASB) June – 2

Financial statements, COVID-19 and August – 1

Financial statements, intent and use of January – 3

Foreign Account Tax Compliance Act (FATCA) June – 3

Forms W-8 and W-9, information reporting and June – 3

Fraud triangle October – 2

Funding programs, CARES Act May – 1

Globalization, impact on businesses of April – 4

Going concern analysis October – 2

Goodwill impairment, COVID-19 and October – 1

Goodwill impairment tests December – 2

Hardship extension, FATCA and June – 3

Health care plans, guidance on July – 4

H.R. 1158, Consolidated Appropriations Act, 2020 February – 1

H.R. 1865, Further Consolidated Appropriations Act, 2020 February – 1

H.R. 6408, SOS America Act July – 4

IESBA Technology Project August – 2

Income tax returns, extension for 2019 May – 1

Internal controls, risk assessment and April – 1

International Accounting Standards Board June – 2

International Code of Ethics for Professional Accountants June – 1

International Ethics Standards Board for Accountants June – 1; Aug. – 2

International Auditing and Assurance Standards Board May – 4; July – 1

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International Ethics Standards Board for Accountants – see: IESBA

International standards, benefits of July – 1

IRS Form 941X, existing and revised October – 3

KAMs, CAMS vs. May – 4

Lease accounting, implementation of new standard on January – 4

Lease-based donation , special tax breaks for August – 3

Life expectancy, regulations for tables of January – 1

Materiality, auditor's judgment on May – 4

Medicaid Waiver Program June – 4

National Adult Protective Services Association (NAPSA) July – 3

Nexus, physical presence and economic Nov. – 1; Dec. – 1

No Action Letter, SEC and September – 4

Non-Compliance with Laws and Regulations (NOCLAR) June – 1

Non-GAAP measures, regulation of Nov. – 4; Jan. – 4

Opportunity zones, tax benefits of qualified April – 2

OSHA, whistleblower complaints and September – 4

Pandemic, Standard Setters’ Response to July – 2

Payment fraud, protecting against December – 4

Payroll tax deferral October – 3

PCAOB, five-year strategic plan of February – 2

PPPFA, New criteria to qualify for forgiveness under July – 2; July – 4

Preparer tax identification number (PTIN) June – 4

Public interest entity (PIE) June – 1

QOZ – see: Qualified opportunity zones

Qualified default investment alternative (QDIA) January – 2

Qualified opportunity zones, tax benefits of April – 2; Aug. – 3

Retaliation, ethical culture and November – 2

Retirement plans, benefits of January – 2

Retirement plans, distribution from November – 3

Revenue recognition standard, implementation of January – 4

Rev. Rul 2020-05, changes under April – 2

Safe harbor approach, the May – 3

Safe harbor, rental real estate and November – 3

SBA Funding Programs May – 1

SBA PPP loans July – 2; Sept. – 1

Schedules K-2 & K-3 September – 3

SEC, PCAOB and January – 4

SEC, disclosure of cybersecurity risks by November – 4

SEC, rules on auditor independence November- 4

SECURE Act August – 3

Seventy percent test January – 2

Simplification Initiative June – 2

Small Business Reorganization Act of 2019 Sept. – 1

South Dakota v. Wayfair December – 1

SOX, whistleblower complaints and September – 4

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Spousal Lifetime Access Trust (SLAT) April – 3

SECURE Act of 2019, changes to January – 1

SECURE Act of 2019, key provisions of February – 1

Smart contracts, fraud risk considerations and February – 4

Social security taxes and benefits, changes in December – 3

Speak-up and listen-up cultures November – 2

State and local taxes, limit on deductibility of September – 1

Sustainability Accounting Standards Board (SASB) October – 4

Task Force on Climate-related Financial Disclosures (TCFD) October – 2

Tax Cuts and Jobs Act – see: TCJA

TCJA, changes in employee deductions February – 3

TCJA, IRC Section 118 and October – 4

Throwback and throwout rules, implications of December – 1

Transit card reimbursement, IRS views on May – 3

Valuation analysis, COVID-19 and September – 2

Whistleblower complaints September – 4

Withholding calculations, change to February – 3

Working remotely May – 2

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Group Attendance and CPE Recordgr

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d Company __________________________________________________ Date __________________

Segment Title _______________________________________________________________________

Location of Seminar _______________________________________________________________

SS# Name State Hours Earned

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I hereby certify that the above individuals viewed this portion of CPA Report, participated in the group discussion, and earned the recommended hours of CPE credit.

Discussion leader _______________________________ Date completed ____________

All CPE hours listed are recommended. They are developed in a manner consistent with AICPA guidelines. Since CPE requirements vary by state and/or professional organization, we suggest you contact the appropriate organization for information about their requirements.