Financial Services Update - Fall 2017

    Business people in front of a cityscape
    This publication covers the most recent accounting, auditing, tax, and regulatory updates that may impact companies within the financial services industry. Readers should take note of each of the pronouncements below and in the event a particular pronouncement, law, or regulation is applicable, readers should understand the implications of such standard.

    We hope you find this update useful in helping to plan for the potential impact to your accounting policies and procedures and in understanding how new regulations may impact business operations.

    Accounting, Auditing, and Tax Updates

    FASB Clarifies the Derecognition of Nonfinancial Assets Guidance 
    The FASB has issued Accounting Standards Update (ASU) No. 2017-05. The purpose of the update is to clarify the scope of Subtopic 610-20 and to add guidance for partial sales of nonfinancial assets. The guidance:

    • Defines "in substance nonfinancial “asset"
    • Clarifies guidance as it relates to nonfinancial asset transfers to a counterparty
    • Clarifies that entities need to identify the nonfinancial asset being promised to a counterparty
    • Unifies guidance related to partial sales of nonfinancial assets
    • Removes rules specifically addressing sales of real estate
    • Eliminates exceptions to the financial asset derecognition model
    • Clarifies the accounting for contributions of nonfinancial assets to joint ventures

    Impact to your company:
    This guidance is relevant for entities that have contracts involving transfers of assets. It provides additional clarity regarding both nonfinancial assets and financial assets. The amendment is effective for annual and interim periods beginning after December 15, 2017 for public entities; all others are effective December 15, 2018. Early adoption is allowed.


    Cayman Islands Extends CRS Deadlines, Implements CRS Penalty Regime
    The Cayman Islands Tax Information Authority (TIA) extended the Notification and account reporting deadlines for the Common Reporting Standard (CRS). Notification was due June 30th, and account reporting was due July 31st. The TIA also recently approved a second tranche of CRS regulations, which provide for monetary penalties of up to $50,000KYD (approximately $60,000USD) for non-compliance.

    CRS is a financial account information reporting regime developed by the Organization for Economic Cooperation and Development (OECD) effective for fiscal year 2016 in the Cayman Islands. CRS requires all Cayman Island financial institutions – whether they will be reporting financial accounts or not – to “notify” the TIA of their financial institution status (“Notification”). Reporting financial institutions (which would include most investment funds organized in the Cayman Islands) must then report financial account holder information to the TIA. For reference, we have made our previous alert available here. Additionally, under the second tranche of CRS regulations, the TIA has enumerated specific offences that will be deemed a contravention of the CRS regulations, and makes clear that non-compliance will result in monetary penalties. The regulations also make clear that liability for non-compliance may extend to directors, general partners, limited liability company members, and certain other individual persons. Importantly, Cayman Island financial institutions must establish, maintain, implement, and comply with written policies and procedures regarding CRS compliance.

    Impact to your company:
    The two-month extension of the Notification deadline was welcomed relief to Cayman Island-based financial institutions. However, the timeframe for Notification and account reporting still remains tenuous because the TIA's internet portal is currently unavailable, and it is unclear when it will become available. Accordingly, Cayman-based funds should continue moving towards readying information required to be reported under CRS to be in a position to readily report that information when the portals do become available, or risk monetary penalties – liability for which extends to natural persons.


    Changes Implemented to Premium Amortization Period on Callable Debt Securities
    The FASB has issued guidance pertaining to premiums on callable debt. ASU No. 2017-08 does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.

    Under current GAAP, entities normally amortize the premium as an adjustment of yield over the contractual life of the instrument. Stakeholders had previously expressed concerns with the current approach given that current GAAP excludes certain callable debt securities from consideration of early repayment of principal, even if the holder is certain that the call will be exercised.

    The amendments are effective for public business entities for annual periods beginning after December 15, 2018, including interim periods within those annual periods. For other entities, the amendments are effective for annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020. Early adoption is permitted.

    Entities are required to apply the amendments on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The entity is required to provide disclosures about a change in accounting principle in the period of adoption.

    Impact to your company:
    The amendments impact all entities that purchase callable debt securities at a premium. Entities that have securities with explicit, non-contingent call features that are callable at fixed prices on preset dates are also impacted by this guidance.


    Stock Compensation - FASB Issues Proposal to Simplify Accounting for Nonemployee Share-Based Payments

    The FASB has proposed ASU 2017-220, intended to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments. The proposed ASU would expand the scope of Topic 718, Compensation: Stock Compensation to include payments for goods and services to nonemployees. The accounting for share-based payments to nonemployees and employees would be similar. The proposed ASU would supersede Subtopic 505-50, Equity: Equity Based Payments to Non-Employees.

    The FASB will determine an effective date after redeliberating input received during the comment period.

    Impact to your company:
    For those entities that issue nonemployee share-based payments, this proposed ASU may impact and simplify the accounting, and also result in certain reduced costs while improving financial reporting.


    FASB Discusses Stock Compensation
    The FASB met and discussed comments received on the proposed ASU 2016-360, Compensation: Stock Compensation (Topic 718): Scope of Modification Accounting. Numerous decisions were made, including:

    • An entity should apply modification accounting in Topic 718 if a change to an award affects the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used), vesting conditions, or classification of the award.
    • The guidance should not explicitly state that an entity is permitted to apply judgment to evaluate whether a change to the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of an award is insignificant.
    • The unit of account for the fair value test under the guidance should be consistent with the current notion in Topic 718.

    Impact to your company:
    This guidance is for nonpublic entities that issue share-based payment awards to employees. It provides simplification of income tax consequences and discusses classification of the award and classification on the statement of cash flows.


    AICPA's ASB Issues SAS No. 132 on Going Concern 
    The Auditing Standards Board (ASB) of the AICPA issued Statement on Auditing Standards (SAS) No. 132, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern. SAS 132 addresses the auditor's responsibilities in the audit of financial statements relating to the entity's ability to continue as a going concern and the implications for the auditor's report.

    SAS 132 supersedes SAS 126, the prior going concern standard, and amends AU-C section 570, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern, section 800, Special Considerations—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks, as amended, and AU-C section, Interim Financial Information (AICPA, Professional Standards, AU-C sections 800 and 930). SAS 132 applies to all audits of a complete set of financial statements, regardless of whether the financial statements are prepared in accordance with a general purpose or a special purpose framework.

    SAS 132 is effective for audits of financial statements for periods ending on or after December 15, 2017.

    Impact to your company:
    This standard will result in additional consideration and possible documentation required on the part of management to ensure the going concern assumption is addressed. Auditors will need to ensure this is being complied with prior to issuance of the auditor's report. This auditing guidance is responsive to the FASB's guidance in ASU 2014-15, which became effective for periods ending after December 15, 2016. For specific responsibilities of management pertaining to going concern, refer to subtopic 205-40 in the FASB codification.


    FASB Simplifies the Goodwill Impairment Test 
    Earlier this year, the FASB issued guidance to simplify the accounting for goodwill impairment (ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment).

    The guidance removes Step 2 of the goodwill impairment test to simplify the subsequent measurement of goodwill. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the new guidance, a goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Other goodwill impairment guidance will remain largely unchanged.

    A public business entity that is an SEC filer should adopt the amendments for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities that adopt the amendments, including not-for-profit entities, should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.

    Impact to your company:
    For those entities that have goodwill, this standard will simplify evaluating impairment and possibly lead to reduced costs when evaluating impairment.


    FASB Clarifies the Definition of a Business 
    The FASB has issued Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business.

    This new guidance changes the definition of a business to assist entities in evaluating when a set of transferred assets and activities is a business. The guidance derives from constituents' concerns that the definition of a business was too broad and challenging to apply. The amendment provides a more robust framework to use in determining when a set of assets and activities is a business and gives more consistency in applying the guidance, reducing the costs of application, and making the definition of a business more operable.

    For public companies, the amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods. For all other companies and organizations, the amendments are effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption, including interim periods, is permitted. Prospective application is required.

    Impact to your company:
    For those entities entering into acquisitions, this guidance clarifies the evaluation of whether the acquisition is a business combination or asset acquisition. It applies more consistency in practice and also includes various examples/scenarios to assist in the analysis. The most significant change resulting from the ASU is the addition of a “screen.” Specifically, under the new guidance, an entity first determines whether substantially all of the fair value (i.e., all of the purchase price) of the gross assets acquired is concentrated in a single identifiable asset or a group or similar identifiable assets. If this screen is met, the set is not a business. If this screen is not met, the entity must then evaluate whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs.


    New Hedge Accounting Guidance Creates More Transparency 
    The FASB has issued guidance intended to improve and simplify accounting rules around hedge accounting, refining and expanding hedge accounting for both financial and commodity risks. ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities is intended to create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes, for investors as well as analysts. The new standard is effective in 2019 for public companies and in 2020 for private companies.

    Impact to your company:
    Over the years, there has been a plethora of guidance as it relates to hedge accounting. This new guidance should simplify the accounting rules as it relates to this sometimes complex area.

    Compensation: New Guidance on Employee Share-Based Payment Accounting 
    Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, is intended to improve accounting for employee share-based payments, the amendments affect all organizations issuing share-based payment awards to their employees.

    There are a number of simplifications put in place as a result of this standard including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. For private companies, the amendments are effective for annual periods beginning after December 15, 2017.

    Impact to your company:
    A number of companies continue to issue shared-based awards to their employees and non-employees/consultants. This guidance will impact those entities which issue such awards with a focus on (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. Companies should understand the implications of this new guidance in terms of evaluating and accounting for such awards.

    Regulatory Updates

    SEC Adopts T+2 Settlement Cycle for Securities Transactions 
    The SEC has adopted an amendment to shorten by one business day the standard settlement cycle for most broker-dealer securities transactions. The current standard settlement cycle for these transactions is three business days, known as T+3. The amended rule shortens the settlement cycle to two business days, T+2. The amended rule is designed to enhance efficiency, reduce risk, and ensure a coordinated and expeditious transition by market participants to a shortened standard settlement cycle.

    "As technology improves, new products emerge, and trading volumes grow, it is increasingly obvious that the outdated T+3 settlement cycle is no longer serving the best interests of the American people,” said SEC Acting Chairman Michael Piwowar. “The SEC remains committed to ensuring that U.S. securities regulation is reflective of modern times, and in shortening the settlement cycle by one day we aim to increase efficiency and reduce risk for market participants."

    As of Sept. 5, 2017, broker-dealers are required to comply with the amended rule. To assist broker-dealers, other securities professionals, and the investing public in their preparation for the implementation of a T+2 settlement cycle, the Commission has established an e-mail address – – for the submission of inquiries to SEC staff.

    Impact to your company:
    The amended rule would prohibit a broker-dealer from effecting or entering into a contract for the purchase or sale of a security that provides for payment of funds and delivery of securities later than T+2, unless otherwise expressly agreed to by the parties at the time of the transaction.

    AICPA Issues Framework Related to Cybersecurity Risk Management 
    In April 2017, the American Institute of CPAs (AICPA) issued a framework related to cybersecurity risk management. The purpose of the framework is to enable all organizations — in industries worldwide — to take a proactive and agile approach to cybersecurity risk management and to communicate on those activities with stakeholders. Visit the AICPA Cybersecurity Resource Center for more information.

    Impact to your company:
    Cybersecurity continues to be a significant topic within all industries and across all organizations. This Framework includes useful tools to enable companies to address this most critical area.

    FINRA Files Proposal to Combat Financial Exploitation of Seniors and Other Specified Adults 
    A proposed amendment to the FINRA Customer Account Information Rule 4512 would require firms to make reasonable efforts to obtain the name of and contact information for a trusted contact person upon the opening of a non-institutional customer's account and when the firm updates such information for current customers. The intent of the proposed amendment is to standardize a best practice to help combat potential elder financial exploitation.

    FINRA has also proposed to adopt a new Rule 2165, permitting members to place temporary holds on disbursements of funds or securities from the accounts specified customers where there is a reasonable belief of financial exploitation of these customers. The amendment asserts that financial firms should have the ability to pause disbursements, contrary to the explicit instructions of a customer, upon reasonable suspicion of financial exploitation.

    The SEC has noted the absence of any mandatory reporting requirement for firms that pause disbursements because of suspected financial exploitation, and urges the SEC and FINRA to amend the proposal by adding such a reporting requirement.

    Impact to your company:
    Once the rule is finalized, it would permit firms to place a temporary hold on a disbursement of funds or securities when there is reasonable belief of financial exploitation, and to notify the trusted contact of the temporary hold.


    Guidance on Social Networking Websites and Business Communications 
    In April 2017, FINRA issued Notice 17-18, providing guidance regarding the application of FINRA rules governing communications with the public to digital communications, in light of emerging technologies and communications initiatives. FINRA previously issued Regulatory Notice 10-06 and 11-39; the latest Notice is not intended to alter the principles or the guidance provided in the earlier Notice, but rather to provide further guidance.

    SEC Proposes Investor Advisors Act Changes to Reflect FAST Act 
    In May 2017, the SEC released proposed amendments to the Investment Advisers Act to reflect changes made under the Fixing America's Surface Transportation Act (the FAST Act). Passed in 2015, the FAST Act amended sections 203(l) and 203(m) of the Advisers Act to exempt small business investment company (SBIC) advisers from registration.

    The proposed amendments would change the definition of a “venture capital fund” under rule 203(l) of the Advisers Act to include SBICs for purposes of section 203(l), as well as modify the definition of “assets under management” under rule 203(m) of the Advisers Act to exclude SBIC assets for purposes of section 203(m).

    Impact to your company:
    This amendment, once approved, would allow advisers of SBIC's an exemption from investment adviser registration, as they would be considered venture capital funds for purposes of the exemption. Additionally, assets of the SBIC would be excluded from the total private fund assets when calculating the registration threshold of $150 million.

    SEC Identifies Five of the Most Common Compliance Violations 
    On February 7, 2017, the Securities and Exchange Commission's Office of Compliance Inspections and Examinations (OCIE) issued an alert identifying the five most frequent compliance topics identified during OCIE examinations of registered investment advisers (RIAs). Based on issues addressed in deficiency letters from over 1,000 investment adviser examinations compiled over the past two years, the five most frequent compliance topics are deficiencies around: (1) the Compliance Rule; (2) regulatory filings; (3) the Custody Rule; (4) the Code of Ethics Rule; and (5) the Books and Records Rule. Investment advisers should be cognizant of these common compliance deficiencies and review their own compliance programs to avoid such weaknesses.

    To view the complete alert issued by the OCIE, click here.

    In addition, the OCIE released a risk alert in August 2017 summarizing observations from cybersecurity examinations. Please see this link for more details.

    Impact to your company:
    Investment advisers should use the findings revealed in the SEC's recent alert to assess their own practices and procedures, with the goal to recognize where compliance gaps may occur and continually improve their compliance programs.

    Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

    Subject matter expertise

    • Jay Levy headshot
      Contact Jay Jay+Levy
      Jay Levy

      CPA, Managing Partner - New York

    • Jeffrey Moskowitz headshot
      Contact Jeff Jeff+Moskowitz
      Jeff Moskowitz

      CPA, Partner

    • william pidgeon
      Contact William William+Pidgeon
      William Pidgeon

      CPA, Partner, Leader- Financial Services Industry

    • Close


      Let’s start a conversation about your company’s strategic goals and vision for the future.

      Please fill all required fields*

      Please verify your information and check to see if all require fields have been filled in.

      Please select job function
      Please select job level
      Please select country
      Please select state
      Please select industry
      Please select topic