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Updated: 16 hours 41 min ago

Initial Offerings Newsletter - Fall 2017

Wed, 10/11/2017 - 12:00am

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Flurry of IPOs to Close Q3 Bodes Well for Strong Q4
Offerings, Proceeds and Filings Have Already Surpassed 2016 Totals While the broader U.S. stock market has been a pillar of stability in 2017, consistently climbing upward with little volatility, the U.S. market for initial public offerings (IPOs) has resembled a rollercoaster ride.  IPO activity started the year off at a crawl, before a frenzy of offerings priced in the Spring.  That was followed by a very slow Summer, prior to a flurry of activity in late September as the calendar turned to Fall.

Despite the bumpy ride, the U.S. IPO market has rebounded well from a very disappointing year in 2016, as offering activity, proceeds and filings have each already surpassed last year’s full year totals.

Through September, there have been 106 IPOs that have raised $24.6 billion in proceeds on U.S. exchanges in 2017, representing increases of 41 percent and 107 percent respectively from Q3 totals of 2016.  The 141 offering filings through the first nine months of the year also reflect a sizable (+41%) jump from a year ago.  Through Q3, U.S. IPOs have averaged $232 million in size, more than 46 percent larger than a year ago.* 

“When you consider the divisive politics in Washington, daily threats of nuclear war from North Korea and multiple natural disasters impacting various regions of the country, the strong performance of the U.S. stock market has been extremely impressive,” said Christopher Tower, Partner in the Capital Markets Practice of BDO USA. “Given that resiliency and the jump in offerings during the second half of September, there is every reason to believe that IPO activity can gain momentum in Q4 and complete a strong rebound from a difficult 2016.” 

*Heavily impacted by $17.9 billion VISA IPO
Renaissance Capital, Greenwich, CT (www.renaissancecapital.com)


Source: Renaissance Capital, Greenwich, CT (www.renaissancecapital.com)


For the fifth consecutive year, the healthcare sector – with 32 IPOs - is leading all industries in the number of offerings brought to market.  Biotech IPOs have been the key driver in healthcare and they should continue to propel offering activity moving forward.

The technology industry has the second most IPOs through Q3, but those 19 offerings are far below expectations.  Many had hoped that 2017 was going to be the year that many of the tech “unicorns” (private companies valued at more than $1 billion) would leave their private stables for the open range of the public markets, but only a few made the trip. 

Given the poor performance of the Snap and Blue Apron IPOs, each still trading below their offering price, there is renewed doubt about the valuations of these private Silicon Valley businesses, leading to a continued resistance to testing the public waters.

The financial (13), energy (13) and industrial (10) sectors are also strong contributors to this year’s IPO rebound.  No other industry has reached double digits in offerings this year.


“For some time now, IPO market observers have been waiting for the technology sector to spring to life and assume its traditional place as the U.S. IPO leader. Unfortunately, every time activity begins to pick up, some poor debuts, most recently by Snap and Blue Apron, have caused other potential tech IPOs to postpone their offering plans,” said Lee Duran, Partner in the Private Equity Practice of BDO USA. “However, there have been successful technology offerings this year. Seattle-based, Redfin, the online real estate company, had a successful launch in late July and it continues to trade well above its offering price. More recently, Roku, the television streaming service, surged 90 percent on its initial two days of trading at the close of Q3. This type of performance is exactly what is needed to entice more of the Silicon Valley set to join the public markets.” 


Q4 Forecast

As we enter the final quarter of 2017, the U.S. IPO market is heating up again.  U.S. stock markets remain near all-time highs with very little volatility, making for an attractive market for new offerings.  With filing activity picking up and a suspected strong backlog of confidential filers, the rebound that began last Spring looks to be starting up again as we enter Q4.

Positive market conditions that have been present throughout the year and the strong performance of offerings overall - the average IPO has delivered better than 20 percent return in 2017 - is likely to drive additional pricings through year-end.

The 2017 BDO IPO Outlook survey of leading investment bankers, released last January, predicted approximately 120 IPOs averaging $235 million in size on U.S. exchanges in 2017, which projected to more than $28 billion in proceeds.  If the IPO market merely maintains its year-to-date performance through Q4, the Outlook’s forecast will be comfortably exceeded.

“Although the SEC’s decision to extend the JOBS Act’s confidential filing provision to all offering companies was a welcome move that should encourage more offerings, it also greatly reduces the visibility of the IPO pipeline,” said Jeff Jaramillo, SEC Practice Leader at BDO USA. “However, with 50 public filings in Q3 as a baseline, it is safe to assume that there is a healthy quantity of potential offering companies ready to move forward should the environment continue to remain favorable for IPOs.” 


For more information on BDO’s Capital Markets services, please contact one of the regional leaders:
  Jeff Jaramillo
Washington, D.C.   Christopher Tower
Orange County   Lee Duran
San Diego   Ted Vaughan
Dallas   Paula Hamric

FASB Flash Report - October 2017

Wed, 10/11/2017 - 12:00am
Accounting Guidance Related to Natural Disasters
Table of Contents  
Summary In the aftermath of recent natural disasters including Hurricanes Harvey, Irma, and Maria, as well as earthquakes in Mexico, this FASB Flash Report is intended as a resource for the related financial reporting issues. These matters may impact third quarter interim reports for SEC registrants. The accounting guidance differs by the type of loss, but practitioners should bear in mind that the losses are generally reflected in the accounting period of the natural disaster, independent of any potential insurance proceeds, which are accounted for separately.
  Details Asset Impairment and Contingent Losses
As a result of natural disasters many assets may be destroyed, damaged or impaired. When considering if impairment exists, an entity should first determine the condition of the asset. If an asset is destroyed, it should be written off as an expense. Otherwise, an impairment may be required.
  • Receivables and Loans - Receivables and loans from entities impacted by natural disasters might be at risk for collectability. Receivables and loans are subject to ASC 310 and ASC 450-20.  A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Loan impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except as a practical expedient, impairment can be measured based on a loan’s observable market price or the fair value of the underlying collateral.
  • Inventory - Under ASC 330-10-35, inventory measured using any method other than LIFO or the retail inventory method is carried at the lower of cost or net realizable value. When the net realizable value of inventory is lower than its cost, the inventory should be written down and recognized as a loss in earnings in the period in which it occurs. For inventory measured using LIFO or the retail method, an adjustment is required when the utility of the goods is no longer as great as their cost. Where there is evidence that the utility of goods will be less than cost, the difference is recognized as a loss of the current period.
  • Indefinite-lived Intangible Assets - Indefinite-lived intangible assets are addressed under ASC 350-30-35.  They are tested for impairment annually, or more frequently if events or circumstances indicate the asset might be impaired, by comparing the fair value of the assets to their carrying amount. Alternatively, an entity may first perform a qualitative assessment to determine whether it is necessary to perform the quantitative assessment described in ASC 350-30-35-19. Note, an indefinite-lived intangible asset is initially tested for impairment before a larger asset group that includes the intangible asset is assessed for recoverability.
  • Property, Plant and Equipment and Finite-Lived Intangibles - Property, plant and equipment held for use and finite-lived intangibles are subject to ASC 360-10. They are tested for recoverability whenever events or circumstances indicate that the carrying amount of the asset group may not be recoverable. If the asset group is not recoverable, its carrying amount is reduced to its fair value.
Alternatively, if an entity concludes that it will sell long-lived assets and the “held for sale” criteria are met, a loss should be recognized for a write-down of the disposal group to fair value less costs to sell.
  • Goodwill - Goodwill is subject to ASC 350.  It is tested for impairment at the reporting unit level at least annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.  When the carrying amount of a reporting unit is less than its fair value, the implied fair value of goodwill must be calculated to determine the amount of goodwill impairment, if any. Similar to indefinite- lived intangibles, an entity could choose to first perform a qualitative assessment to determine whether a quantitative assessment is needed. Goodwill is tested for impairment only after indefinite-lived intangible assets and amortizing assets, such as PP&E, have been assessed. Private companies currently have an option to elect a simplified method of accounting for goodwill. In addition, the amendments in ASU 2017-04, Simplifying the Test for Goodwill Impairment should be applied when effective, which is periods beginning after December 15, 2019 for public companies.[1] ASU 2017-04 may be early adopted. For additional information on ASU 2014-04 see BDO’s Flash Report here.
  • Contingent Losses - Liabilities related to natural disasters are addressed by ASC 450-20, in the absence of other GAAP (see discussion of “Exit Activities” below).  A liability should be accrued by a charge to income if it is probable that it has been incurred at the financial statement date and the amount of the loss can be reasonably estimated.  This includes, for example, the costs of repairs and maintenance that are not capitalized.
  • Exit Activities - Following a natural disaster an entity may choose to sell or terminate a line of business, close the business activities in a particular location, relocate the business activities from one location to another, make changes in the management structure, or undergo a fundamental reorganization that affects the nature and focus of operations. All of these items represent exit activities accounted for under ASC 420, Exit and Disposal Cost Obligations. These costs include:
    • Involuntary employee termination benefits pursuant to a one-time benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred compensation contract.
    • Costs to terminate a contract that is not a lease.
    • Other associated costs, including costs to consolidate or close facilities and relocate employees.
A liability for a cost associated with an exit or disposal activity is recognized at fair value in the period in which the liability is incurred, (except for a liability for one-time employee termination benefits that are incurred over time). If fair value cannot be reasonably estimated, the liability is recognized in the period in which fair value can be reasonably estimated.

A liability for costs that will continue to be incurred under an operating lease for its remaining term without economic benefit is recognized at the cease-use date.[2]
  • Temporary Differences and Deferred Income Tax Liabilities - Book recognition of reserves, accruals and impairments would likely impact the measurement of temporary differences and related deferred income taxes under ASC 740. Careful consideration of deferred income taxes including the valuation allowance is required in the period that book losses, reserves and impairments are recognized. The only exception is the impairment of nondeductible goodwill for which no deferred tax effect should be recognized. For income tax purposes, uncollectible receivables can be deducted when they are considered “worthless”. The worthlessness of a debt is a question of fact. Obsolete inventory can be deducted when it is no longer able to be used or sold in a “normal” manner and it is being disposed of through a liquidator or junkyard, a donation or it is destroyed.
  • Balance Sheet Presentation - Asset impairments and liabilities related to natural disasters should be recognized independent of any related insurance recoveries.  Liabilities are usually shown gross.  This is because the conditions for netting the liabilities against an insurance receivable under ASC 210-20 are not typically satisfied as the insurance receivable and claim liability are with different counterparties.
  • Income Statement Presentation - ASC 225-20-45-16 states a material event or transaction that an entity considers unusual, infrequent or both is reported as a separate component of income from continuing operations. The nature and financial effects of each event or transaction is presented separately or disclosed in notes to the financial statements. Gains or losses of a similar nature that are not individually material are aggregated.
Losses from natural disasters that are unusual, infrequent or both, should be reported as a component of income from continuing operations on the statement of operations or disclosed in the footnotes. 
Generally, a loss and the related insurance recovery may be presented in the same line item, as limited specific classification guidance exists for these items.
Involuntary Conversions
An involuntary conversion is the exchange, or conversion, of a nonmonetary asset (e.g., fixed assets) to monetary assets such as insurance proceeds.  To the extent the cost of a nonmonetary asset is less than the amount of monetary assets received, the transaction results in a gain.[3]  This is true even if the insurance proceeds are reinvested in replacement nonmonetary assets, such as new equipment.
In some cases, a nonmonetary asset may be destroyed or damaged in one accounting period and the amount of monetary assets to be received is not determinable until a subsequent accounting period. In those cases, any gain is recognized in accordance with the contingent gain guidance in ASC 450-30.  Specifically, the gain should be recognized when all uncertainties have been resolved (typically when cash is received), at which point it is considered realizable.  However, if the insurance recovery is determinable, such as when the insurance company does not dispute the claim, a recovery equal to the amount of the loss should be recognized when its receipt is considered probable.
  • Example - Assume that flooding caused physical damage to property and equipment. The damage to the equipment, having a carrying value of $1,000, was complete. The property was partially damaged; the portion of the building declared uninhabitable had an allocated carrying value of $5,000. There is insurance in place which will cover the cost to replace the equipment and repair the building, where the carrier has confirmed coverage of the claim and it is not being disputed by the insurance company. The estimated cost to do both is $10,000.
The company would record an impairment loss of $6,000 (and reduce its recorded balance of property and equipment) in the period of the flood. Further, the company would record an insurance recovery of $6,000 to reflect the proceeds from the insurance coverage to the extent of the asset write-off because recovery of that amount is considered probable in the circumstances. In the period the new equipment is purchased and repairs are made to the property, the company would record capital additions of $10,000.  Additionally, in the period the company receives the incremental $4,000 of proceeds from the insurance coverage, it would record a gain on the involuntary conversion of that amount. Note that if the insurance company in this example denied or contested coverage, it may be inappropriate for the company to record any benefit of the coverage until such time that all uncertainties surrounding the extent of coverage is resolved – usually at the time cash is received from the insurance company.
Insurance Proceeds
As mentioned previously, impairment losses are generally accounted for separate from any related insurance. With respect to accounting for insurance proceeds, GAAP includes the following guidance.
  • Business Interruption - Natural disasters often cause disruptions in operations which result in losses. These losses are often covered by business interruption insurance and should be accounted for separate from other insurance proceeds. ASC 225-30 covers the presentation of business interruption insurance and defines business interruption insurance as “insurance that provides coverage if business operations are suspended due to the loss of use of property and equipment resulting from a covered cause of loss. Business interruption insurance coverage generally provides for reimbursement of certain costs and losses incurred during the reasonable period required to rebuild, repair, or replace the damaged property.”
When losses incurred can be reasonably estimated and recovery is considered probable a receivable may be recorded. However, the amount recorded should not be greater than costs incurred to date. Therefore, proceeds for lost profits are treated as a contingent gain and typically recorded at the settlement date.
If business interruption insurance is received, entities may elect a policy for how such amounts are presented in the income statement as long as it does not conflict with other applicable GAAP.
In connection with business interruption insurance proceeds, the notes to the financial statements should disclose the nature of the event resulting in business interruption losses and the aggregate amount of business interruption insurance recoveries recognized during the period and the line items in the income statement in which those recoveries are classified.
  • Property and Casualty - The cash flow presentation of property insurance proceeds covering damage or loss depends on the nature of the property. For example, insurance proceeds received in connection with leased property would be classified as operating cash flows for an operating lease or as investing cash flows for a capital lease.
  • Cash Flow Statement Presentation - Since insurance proceeds are classified based on the nature of the insurance coverage rather than the intended use of the proceeds, amounts received for business interruption, inventory losses and operating lease assets are presented as operating activities.  If insurance proceeds are received for the loss of property, plant and equipment, they should be presented as investing cash flows.
In addition, when cash proceeds from insurance are significant, SEC registrants should disclose where the proceeds are classified in the statement of cash flows and discuss the insurance proceeds or settlements in MD&A. The discussion should include a description of the proceeds or settlement, why it was received, planned use for the receipts and any impact to reported earnings.
Derivative and Hedge Accounting
A key requirement for obtaining cash flow hedge accounting is that the hedged forecasted transaction is probable of occurring. Natural disasters can affect operations, causing some transactions to be curtailed, delayed or canceled. Companies that have designated forecasted transactions in cash flow hedging relationships e.g., purchases or sales of goods, or interest payments on debt, may determine that the hedged transaction is no longer probable of occurring within the originally specified time period, in which case hedge accounting should be discontinued prospectively. However, the related gains and losses in accumulated other comprehensive income should be reclassified in earnings only if it is probable that the forecasted transaction will not occur by the end of the period originally specified or within an additional two-month period thereafter. Reclassification of gains and losses would also affect deferred income tax accounting and intraperiod allocation under subtopic 740-20.
Natural disasters also may affect the eligibility for the “normal purchases and normal sales” scope exception to derivatives accounting for commodity contracts e.g., oil and gas. This exception is based on physical delivery and if that is no longer probable due to curtailment or cancelation of operations such that the contract instead would now settle net, the eligibility for applying this scope exception would no longer be met. Consequently, the contract should be recorded on the balance sheet at its current fair value and subsequently continue to be marked to fair value, similar to any other derivative.
Other Accounting Considerations
Natural disasters affect many aspects of a business. Additional consideration should be given to items such as debt, investments (including debt and equity securities, equity and cost method investments and investments in joint ventures), going concern, subsequent events, environmental remediation obligations, fair value estimates, and stock compensation.

In addition, entities should disclose the material event or transaction that gave rise to an unusual or infrequent loss, as described in ASC 225-20-45-16.  Entities should also consider disclosures about risks and uncertainties in ASC 275-10-50. Further, natural disasters may trigger incremental disclosures for SEC reporting purposes.
  • Additional Resources
    • SEC Press Release 2017-164, SEC Monitoring Impact of Hurricane Irma on Capital Markets, Continues to Monitor Impact of Hurricane Harvey
    • IRS News Release IR-2017-135, IRS Gives Tax Relief to Victims of Hurricane Harvey; Parts of Texas Now Eligible; Extension Filers Have Until Jan. 31 to File
For questions related to matters discussed above, please contact:
  Yosef Barbut
National Accounting Partner   Adam Brown
National Director of Accounting   Gautam Goswami
National Accounting Partner   Jennifer Kimmel
National Accounting Senior Manager   Jin Koo
National Accounting Partner   Jon Linville
National Accounting Director   Angela Newell
National Accounting Partner         [1] 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, including not-for-profit entities, should adopt the amendments for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. [2] Upon the adoption of ASC 842, the right-of-use asset will be evaluated for impairment under ASC 360. [3] “Gain” refers to recovering amounts in excess of recognized losses.  

Significant Accounting & Reporting Matters Q3 2017

Tue, 10/10/2017 - 12:00am
Issued on a quarterly basis, the Significant Accounting and Reporting Matters Guide provides a brief digest of final and proposed financial accounting standards as well as regulatory developments. This guide is designed to help audit committees, boards and financial executives keep up to date on the latest corporate governance and financial reporting developments.

Highlights include:
  • FASB Developments
  • SEC & PCAOB Highlights
  • IASB Projects
  • And more!

SEC Flash Report - October 2017

Fri, 10/06/2017 - 12:00am
SEC Adopts Interpretive Guidance for Pay Ratio Disclosures Summary The SEC recently adopted interpretive guidance to assist companies in their efforts to make the pay ratio disclosures mandated by the Dodd-Frank Act.[1] The pay ratio rule requires issuers to disclose 1) the median annual total compensation of all employees, except the chief executive officer, 2) the annual total compensation of the CEO, and 3) the ratio of those two amounts in any annual report, proxy, or registration statement that requires disclosure of executive compensation pursuant to Item 402 of Regulation S-K.  The rule is effective for issuers with fiscal years beginning on or after January 1, 2017, which means that issuers will begin making the pay ratio disclosures in early 2018. 
  Details As the pay ratio rule permits the use of estimates, assumptions and statistical sampling to determine the median employee, some constituents expressed concern about the compliance uncertainty and potential liability associated with the required disclosures. The SEC’s interpretive guidance was partly issued to alleviate these concerns and states that the Commission will not take an enforcement action that challenges a registrant’s pay ratio disclosures if the estimates have a reasonable basis and are made in good faith.  The interpretive guidance also clarifies that:
  • The consistently applied compensation measure used to calculate the median employee may be derived from existing internal, such as tax or payroll, records even if those records do not include every element of compensation, for example, equity awards.
  • The determination of workers that meet the definition of an employee may be drawn from pre-existing published guidance under employment or tax laws.
The staff updated its compliance and disclosure interpretations to reflect the Commission guidance above and issued separate interpretive guidance to help registrants understand how they can utilize statistical sampling and estimates in making their pay ratio disclosures.  The guidance provides hypothetical examples related to the use of sampling and other reasonable methodologies.
For questions related to matters discussed above, please contact:
  Jeff Jamarillo
National Assurance Partner & Director of SEC Paula Hamric
National Assurance Partner    [1] Please refer to our BDO Flash Report on the pay ratio rule, adopted in 2015.  

BDO Knows: Revenue Recognition

Thu, 10/05/2017 - 12:00am
Topic 606, Revenue from Contracts with Customers - Exploring Transition Methods ASU 2014-09, Revenue from Contracts with Customers (Topic 606), comes into effect for public business entities (PBE) for annual reporting periods beginning after December 15, 2017, including interim periods within that year. Therefore, a calendar year-end public entity will reflect the new standard in its first quarter ending March 31, 2018, each subsequent quarter, and also in the year ending December 31, 2018. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year.
  Read More

SEC Flash Report - October 2017

Mon, 10/02/2017 - 12:00am
SEC Issues Updates to Reflect New Revenue Recognition Standard On August 18, 2017, the SEC staff released Staff Accounting Bulletin (SAB) No. 116 to conform its staff guidance on revenue recognition with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. SAB No. 116 states that SAB Topic 13, Revenue Recognition, and SAB Topic 8, Retail Companies, are no longer applicable once a registrant adopts ASC Topic 606. It also modifies Section A, Operating-Differential Subsidies of SAB Topic 11, Miscellaneous Disclosure, to clarify that revenues from operating-differential subsidies[1] presented under a revenue caption should be presented separately from revenue from contracts with customers accounted for under ASC Topic 606 or as a credit in the costs and expenses section of the statement of comprehensive income. Prior to adoption of ASC Topic 606, registrants should continue to refer to prior SEC guidance on revenue recognition topics.

The SEC also issued two releases to update its interpretive guidance on revenue recognition:  
For questions related to matters discussed above, please contact:
  Jeff Jaramillo
National Partner   Jin Koo
National Assurance Partner   Adam Brown
National Director of Acounting       [1] Revenues representing operating-differential subsidies under the Merchant Marine Act of 1936, as amended. Operating-differential subsidy is a payment made by the federal government to the owner-operator of a qualified American flag vessel to cover certain costs.

BDO Comment Letter - Exposure of Proposed Language to Section 14 of the Uniform Accountancy Act

Mon, 10/02/2017 - 12:00am
We understand that there has recently been disagreement about what may or may not be prohibited under Section 14 of the Uniform Accountancy Act as it relates to the use of management accounting designations by non-CPAs. We believe that the proposed phrase 'use an accounting designation that includes the word management' should be further developed to avoid any seeming contradiction with other sections of the Act.
  Read More

BDO Comment Letter - File No. PCAOB – 2017-01

Mon, 10/02/2017 - 12:00am
File No. PCAOB – 2017-01: Public Company Oversight Board; Notice of Filing of Proposed Rules on the Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, and Departures From Unqualified Opinions and Other Reporting Circumstances, and Related Amendments to Auditing Standards

BDO supports the Board's intention to monitor the implementation of critical audit matters, as we believe such monitoring will be critical to successful implementation.
  Read More

Corporate Governance Flash Report - September 2017

Thu, 09/28/2017 - 12:00am
PCAOB 2017 Inspections Will Continue to Focus Where Risk Resides Download PDF Version
Summary The PCAOB will continue to select the majority of issuer audits for inspection review on a risk-weighted basis – focusing on audit work on the most challenging areas, including financial statement accounts and disclosures requiring the highest degree of management judgment. Key areas of inspection focus continue to stem from recurring audit deficiencies, recent economic developments, and areas of significant judgment. Additionally, new accounting and auditing standards, multinational audits, and audit firms’ use of information technology and systems of quality control make the list as well.
  Details Timing and Population
The PCOAB has issued its August 2017 Staff Inspection Brief detailing information about the upcoming 2017 PCOAB inspections of registered audit firms.

Key Areas of Inspection Focus in 2017
Recurring audit deficiencies will again be key areas of focus this year including assessing and responding to risks of material misstatement, auditing accounting estimates, and internal control over financial reporting. While some corporations continue to argue that requirements from Sarbanes-Oxley Section 404(b) come at significant cost without perceived benefit, a study in the current issue of Auditing: A Journal of Practice & Theory provides statistical data correlating internal control environments with identified material weaknesses with significantly higher fraud risk than is found in the general population. 

Recent economic developments are garnering attention from the PCAOB and this may include M&A activity, international events such as Brexit, investments in higher risk instruments, fluctuations in oil and natural gas prices, and other industry specific risk factors.

Areas of significant judgement continue to represent more challenging audit areas and generally greater risk, including  considerations related to going concern analyses and income tax disclosures.

New accounting standards and new reporting requirements this year include the hot topics of FASB issued guidance on revenue recognition and lease accounting in addition to the newly enacted PCAOB audit rules requiring public auditor disclosures on Form AP. While the revenue and lease accounting guidance is not yet effective, audit firms can expect to answer questions on how they are assessing the readiness of their issuer clients’ plans for addressing and reporting on the pending accounting changes.

Audit firms themselves will attract PCAOB reviews for multinational audits, use of information technology, and audit firm systems of quality control. In today’s environment, firms are challenged to facilitate transparency and opine on the integrity of financial statements while managing similar external and competitive risk factors as issuers.  The PCAOB has expressed it is particularly interested in firms’ software audit tools, consideration of cybersecurity risk, and systems of quality control including: root cause analysis, independence, engagement quality reviews, and professional skepticism.

The Staff Inspection Brief also includes an appendix that contains historical data related to inspections of registered firms. This data indicates that revenues, receivables, non-financial assets, financial instruments, inventory, income taxes, and equity transactions as the most frequently inspected areas due to both materiality and risk.

For more information and educational opportunities on these and other topics related to audit committee oversight, please visit BDO’s Center for Corporate Governance and Financial Reporting.
For more information, please contact one of the following practice leaders: 
  Amy Rojik
Partner Lee Sentnor
Senior Manager

2017 BDO Cyber Governance Survey

Mon, 09/25/2017 - 12:00am

Explore the 2017 BDO Cyber Governance Survey:
As the governance needs of corporate America continue to grow and diversify, directors at publicly traded companies are constantly being asked to do more. In recent years, perhaps no area of board responsibility has grown faster than the oversight of an organization’s cybersecurity. 

The BDO Cyber Governance Survey, conducted annually by the Corporate Governance Practice of BDO USA, was created to act as a barometer to measure the involvement of public company directors in cyber-risk management. The 2017 BDO Cyber Governance Survey, conducted in August of 2017, examines the opinions of 140 corporate directors of public company boards with revenues ranging from $250 million 
to more than $1 billion. 
  “Earlier this year, a group of U.S. Senators introduced legislation - the Cybersecurity Disclosure Act of 2017 – intended to promote transparency in the oversight of cybersecurity risks at publicly traded companies. The bill would require that annual reports to the SEC must disclose the level of cybersecurity expertise of the board; or, if none exists, what other steps the reporting company has taken to address cybersecurity. The bill is just the latest salvo from legislators, regulators and good governance advocates in the ever-expanding cyber-war,” said Gregory A. Garrett, Leader of International Cybersecurity at BDO USA. “For the past four years, BDO USA has surveyed public company board members on their role in planning for and mitigating cyber-attacks at their companies. The annual survey has documented the continued ascension of cybersecurity in corporate boardrooms, as directors are being briefed more often and are responding with increased budgets to address this critical area. It also suggests where boards may need to better focus their efforts.”
Cyber-Risk Management  According to the 2017 BDO Cyber Governance Survey, more than three-quarters (79%) of public company directors report their board is more involved with cybersecurity than it was 12 months ago. A similar percentage (78%) say they have increased company investments during the past year to defend against cyber-attacks, with an average budget expansion of 19 percent. This is the fourth consecutive year that board members have reported increases in time and dollars devoted to cybersecurity. 

Almost one in five (18%) board members indicate that their company experienced a cyber-breach during the past two years, a percentage very similar to the previous two years (22%). 

A majority (61%) of corporate directors say their company has a cyber-breach/incident response plan in place, compared to less than a fifth (16%) who do not have a plan, and close to one-quarter (23%) who are not sure whether they have such a plan. Those with plans represent approximately the same percentage as a year ago (63%), but reflect a major improvement from 2015, when less than half (45%) of directors reported having one.
  “When considering the responses of board members regarding whether their company has experienced a cyber-breach, it is important to note that many companies do not report their breaches and, in other instances, businesses can be unaware they have been hacked. Given those realities, we view this particular finding as generally appearing lower than reality,” said Eric Chuang, Managing Director of Cyber Incident Response at BDO USA. “The continuing year-over-year increases in board involvement and investments in cybersecurity is extremely positive, but the percentage of businesses with breach response plans in place – although much improved from two years ago – is still far below where it needs to be.”    BDO FOOD FOR THOUGHT

Earlier in 2017, an Executive Order signed by President Trump outlined a very specific call to action to safeguard the critical cyber infrastructure of the U.S. government, sending a powerful message that cyber risk management is, and should be, of utmost importance to all organizations. As cybersecurity is rightly elevated to those charged with governance, BDO continues to explore various aspects of board-level risk management efforts that directors should keep top of mind, including:

   Briefing Frequency Close to four-fifths (79%) of public company board members report that their board is more involved with cybersecurity than it was 12 months ago. The vast majority of directors (91%) are briefed on cybersecurity at least once a year – this includes more than a quarter (28%) that are briefed quarterly, and better than one-fifth that are briefed twice a year (21%). The balance are briefed annually (36%) or more often than quarterly (6%). 

Surprisingly, nine percent of board members say they are not briefed at all on cybersecurity. However, during the four years BDO has conducted this survey, the percentage of directors reporting no cybersecurity briefings has dropped consistently (see chart to the right).

Lack of Sharing on Cyber-Attacks Despite this positive progress, the survey also found that businesses still fail to share information on cyber-attacks with entities outside of their company.

Sharing information gleaned from cyber-attacks with external entities is a practice that needs to become more prevalent for the safety of critical infrastructure and national security. The U.S. government has communicated ways in which businesses can contact relevant federal agencies about cyber incidents.

Unfortunately, when asked whether they share information they gather from cyber-attacks, only one-quarter (25%) of directors – virtually unchanged from 2016 (27%) - say they share the information externally. A similar proportion (24%) say they do not share the information with anyone and approximately half (51%) are not sure whether they do or not.

Of those sharing information on their cyber-attacks, the vast majority (86%) share with government agencies (FBI, Department of Homeland Security (DHS)) and close to half (47%) share with ISAC (Information Sharing & Analysis Centers). Very few (8%) share with competitors.

  “For the second consecutive year, the survey reveals a continued vulnerability in cybersecurity – the ongoing failure of companies to share information they’ve gathered from cyber-attacks with federal agencies, ISACs, or competitors,” said John Riggi, Managing Director of Cybersecurity and Financial Crimes at BDO USA. “Sharing information gleaned from cyber-attacks is a key to defeating hackers, yet just one-quarter of directors say their company is sharing that information externally. This behavior needs to change if corporate America is to prevail in the cyber wars.”    BDO FOOD FOR THOUGHT

In certain situations, concerning cybersecurity, the FBI and DHS could truly be viewed as a corporate director’s two best friends. Relationships with law enforcement and other key advisors should be cultivated before they are needed in order to avoid or mitigate a cyber breach. Information-sharing (e.g., critical intelligence provided before disaster strikes) can help companies better protect themselves from costly attacks that can cause major disruptions to their business, and seriously undermine relationships and a company’s reputation.

Ransomware  Earlier this year, the “Wanna Cry” cyber-attack, which impacted businesses in more than 150 countries, greatly raised awareness of the threat posed by ransomware. When asked whether their company had taken steps to minimize its vulnerability to ransomware, a majority (60%) indicate they are addressing this threat. 

Of those targeting ransomware vulnerabilities, a majority (58%) are placing an increased emphasis on patch management and increasing the frequency of data back-ups (58%). Close to half (46%) say they have increased their ability to restore data faster.

  “This year’s study indicates that most boards are aware of the rising threat of ransomware and they are taking steps to proactively address this risk,” said Gregory Garrett. “Given the significant threat posed by ransomware, it is important that the sizeable minority of board members who say they have yet to take steps to minimize their vulnerability to this risk, do so as soon as possible.”    BDO FOOD FOR THOUGHT

Given the breadth and depth of exposure to Wanna Cry, Petya Marks and Hidden Cobra malicious software, BDO encourages companies to focus on human behavior, mitigation strategies, patch applications, monitoring, and the development and testing of an incident response plan to prevent falling victim to similar malware attacks in the future.

   SOC for Cybersecurity  Earlier this year, the American Institute of Certified Public Accountants (AICPA) introduced a Cybersecurity Risk Management Framework—also known as “SOC (System and Organization Controls) for Cybersecurity”—that provides companies with a proactive approach for designing a risk management program and communicating about its effectiveness. When asked about this initiative, just four in 10 directors are familiar with it. 

Of those that are aware of the AICPA’s new voluntary risk management framework, more than a third (35%) indicate that they are likely to utilize both readiness testing and formal audit/attestation for their program. A little more than one-quarter (27%) indicate they will just utilize the readiness testing for their programs, while a much smaller minority (6%) plan to use the formal audit/attestation exclusively. Almost one-third (32%) indicate they either do not plan to utilize the framework (14%) or were unsure (18%) if they would.

  “Many businesses already have programs in place to help them assess how they are handling cyber-risk. The AICPA’s Cybersecurity Risk Management Framework was created to augment those efforts by providing an independent assessment of a company’s cyber-risk management,” said Jeff Ward, National Managing Partner for Third Party Attestation Services at BDO USA. “Given the fact that the framework was rolled out just a few months ago, it isn’t surprising that only 40 percent of board members are aware of it. More importantly, of those aware of the framework, better than two-thirds (68%) indicate that their company is likely to utilize at least one of the related services. This demonstrates that boards are very invested in cybersecurity and they are eager to have an independent assessment communicate the effectiveness of their efforts.”    BDO FOOD FOR THOUGHT

SOC for Cybersecurity is designed to help standardize the way organizations define their cybersecurity objectives and report against them. Explore BDO’s thought leadership and archived webinar highlighting the benefits of SOC reporting and outlining which approach within the framework may be best for your organization.

    Conclusion  Cybersecurity will continue to demand the attention and resources of almost all organizations, and the table stakes for those charged with governance at public companies are significant. Both the investment and regulatory communities are paying close attention. 

In 2017, the New York Department of Financial Services (DFS) put forth a ground-breaking regulation applicable to thousands of financial institutions that do business in the state of New York. The first-of-its-kind regulation shines a bright light on the responsibility of boards. In addition to designating a qualified individual (e.g., a Chief Information Security Officer) to oversee, implement and enforce the organization’s cybersecurity program and report to the board or a senior officer at least annually, the regulation holds company board members and senior officers personally liable for ensuring annual compliance certification. 

With cybersecurity threats on the rise for organizations of all sizes and in all industries, boards are encouraged to remain abreast of cybersecurity developments and continue to educate themselves and their organizations. Companies must be able to detect and mitigate cyber breaches that have the potential to disrupt business operations, damage their brand, and cause significant financial losses. To hear more about BDO’s observations, tune into our “2017 What’s on the Minds of Boards” webinar. For additional hot topics in corporate governance, refer to the 2017 BDO USA Survey on Financial Reporting and Corporate Governance issues.
BDO Cyber Governance Survey These are just a few of the findings of the 2017 BDO Cyber Governance Survey, conducted by the Corporate Governance Practice of BDO USA in August 2017. The annual survey examines the opinions of 140 corporate directors of public company boards regarding corporate governance and financial reporting issues. 

BDO USA’s Corporate Governance Practice is a valued business advisor to corporate boards. The firm works with a wide variety of clients, ranging from entrepreneurial businesses to multinational Fortune 500 corporations, on myriad accounting, tax, risk management and forensic investigation issues.
For more information, please contact:
  Amy Rojik   John Riggi   Eric Chuang   Michael Stiglianese   Gregory Garrett   Jeff Ward   Stephanie Giammarco    

EBP Commentator - Summer 2017

Wed, 09/20/2017 - 12:00am

Download PDF Version
  Table of Contents     LOL... ROFL… BRB…

With the advent of social media, there has been a proliferation of new acronyms making their way into our everyday language. Even those who are not social media savvy may likely recognize some of these popular acronyms: LOL - Laughing Out Loud; ROFL – Rolling On Floor Laughing; BRB – Be Right Back. Similar to the world of social media, there are many acronyms pertaining to Employee Benefit plans (EBP). This edition explores several EBP acronyms we believe would be beneficial for plan sponsors to understand.

RMD Contributed by Wendy Schmitz
RMD is short for Required Minimum Distributions. The Internal Revenue Service (IRS) does not allow retirement funds to be kept tax free indefinitely. At age 70½ participants are required to withdraw a minimum amount from their Individual Retirement Account (IRA), Simplified Employee Pension (SEP) IRA, SIMPLE IRA (Savings Incentive Match Plan for Employees), or retirement plan account (with some exceptions for Roth IRAs).

These distributions are not generally tax free nor can taxes be avoided by rolling the RMD into another tax-deferred account. The account owner is taxed at their regular income tax rate on the amount of the RMD withdrawn. Depending on the dollar amount of the RMD, no tax withholdings may be deducted from the amount distributed; however, the taxes would then need to be trued up on the account owner’s annual federal tax return.

Sponsors of retirement plans (including 401(k), 403(b) and defined benefit pension plans) are required to ensure that RMDs occur timely. Despite the fact that a participant may be receiving RMDs[1], the sponsor is required to continue to make contributions on behalf of that participant (in accordance with the plan document) as well as allow the participant to continue to make salary deferrals, if appropriate.

For a participant’s first RMD, the RMD may be delayed until April 1st of the year after the participant turns age 70½. For all subsequent years (including the year in which the participant first receives an RMD which was delayed to April 1st), RMDs must be made by December 31st. RMDs may also be delayed for participants who are still employed (although generally not available to employees who are deemed to be a 5% owner and certain relatives of such an owner) as well as for older 403(b) accounts (generally pre-1987 accounts).

Required minimum distribution rules also apply after a participant’s death. In general, the IRS requires RMDs of the participant’s death benefit even if death occurs before age 70½. Consultation with a qualified tax expert would be needed as death benefits are a complicated tax area.

Watch for changes in plan demographics since RMDs may become more common with an aging participant population. Some plan sponsors employ third party service providers, such as the plan record-keeper, to administer the RMDs. However, the ultimate responsibility of ensuring the plan is operated in accordance with the IRS rules and regulations still remains with the plan sponsor. Plan sponsors should obtain an understanding of the processes used by the service provider as well as what input or approvals the service provider requires from the plan sponsor in order to perform the distribution. Additionally, sponsors should monitor the service providers to ensure the RMDs are made on a timely basis.

There are consequences if RMDs are not made timely. For the individual participant, the amount not withdrawn timely is taxed at a 50% rate. In a worst case scenario, a failure to make timely RMDs to eligible participants could cause loss of the tax exempt status for the plan, which would have devastating effects on all plan participants as well as significant tax consequences for the plan sponsor. However, this is generally rare as regulators try to avoid plans disqualifications, due to the harm it causes participants. Regulators instead provide sponsors with the opportunity to correct operational defects, such as this, through the IRS correction program, Employee Plans Compliance Resolution System (more commonly referred to as EPCRS, yet another industry acronym). Under EPCRS, a plan sponsor may use either the Self-Correction Program (SCP) or the Voluntary Correction Program (VCP) to correct RMD failures. There are benefits to both methods. The SCP, which is generally for small timely identified errors, does not require a filing or filing fee with the IRS whereas the VCP requires filing of a form and payment of a filing fee. A key benefit to the VCP is that the IRS will waive the 50% participant tax if the plan sponsor requests the waiver as part of the filing submission. If the VCP is not used and the participant requests a waiver, each affected participant or beneficiary must individually apply for a waiver of the 50% tax using the Form 5329 as part of their federal income tax return.

Understanding and monitoring RMDs is an important focus for sponsors since there are, to put it in social media terminology, consequences IRL (In Real Life) for missed or untimely RMDs. On a more serious note, RMDs are complex and consultation with a qualified tax expert is recommended. BDO is available to assist sponsors and fiduciaries in addressing the rules and considerations associated with RMDs.

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MEP Contributed by Mary Espinosa
Multiple Employer Plans (also known as MEPs) are sometimes incorrectly interchanged with Multiemployer Plans. Despite the misperception, these terms are not the same and are actually very different:
  • MEPs are either defined benefit or defined contribution retirement plans adopted by two or more employers that are not treated as related entities (in other words, the employers are not members of a controlled group, commonly controlled group or affiliated service group).
  • Multiemployer refers to a plan maintained under one or more collective bargaining agreements to which more than one employer (usually within the same industry, such as a labor union) is required to contribute.
MEPs can be structured in various ways. An open MEP is offered to employers that have no connection to each other aside from their participation in the MEP. Open MEPs are generally provided by an independent investment advisory firm or an organization created specifically to provide benefits to smaller employers. Alternatively, a closed MEP is generally sponsored by an industry or trade group. In a closed MEP, the employers must have the ability to control or exercise authority over the MEP. A Professional Employer Organization (PEO) is an arrangement whereby the PEO hires the client company’s employees and is the employer of record for tax and insurance purposes. The MEP is sponsored by the PEO and adopted by the PEO’s clients. A common ownership MEP is when the adopting employers do have some common ownership, but the ownership is insufficient for them to be considered related employers under the Internal Revenue Code (IRC).
Two or more employers can also pool their contributions to provide group health and other welfare benefits, such as dental, vision, life and disability in Multiple Employer Welfare Arrangements (MEWAs). Contributions can be made by both employees and employers based on the estimated costs associated with the number of covered employees. MEWAs are offered by the same types of organizations that sponsor MEPs.
Under the IRC, a MEP is treated as a single plan and must comply with certain qualification rules, including the exclusive benefit requirement, eligibility and vesting, etc. However, a MEP may or may not be treated as one plan under the Employee Retirement Security Act of 1974 (ERISA). For example, open MEPs usually do not meet the common interest criteria and, as such, each adopting employer is considered to be maintaining a separate plan and therefore each plan potentially may have both a separate Form 5500 filing requirement as well as a separate audit requirement, depending on the number of participants. In its Advisory Opinion 2012-04A, the Department of Labor (DOL) discusses the criteria it considers in determining whether a MEP may or may not be treated as one plan. Such criteria includes how members are solicited, who is entitled to participate, the purposes for which the association was formed, and who controls and directs the activities and operations of the benefit program.
MEPs and MEWAs may provide a solution for small employers looking to provide large plan benefits to their employees, while at the same time reducing administrative and cost burdens and minimizing fiduciary responsibility (including reporting and disclosure requirements). However, there are complexities associated with these plans. For instance, depending on whether the MEP is structured as closed or open, there may be a need for separate adoption agreements for each adopting employer, etc. Additionally, there may be limitations on an employer’s ability to exit a MEP and the ability of that employer’s employees to take their money out of the plan. Since the exit of one employer would not ordinarily terminate a MEP, technically the plan has not experienced a distributable event and, if there is no distributable event, employees would then be required to wait until a distributable event occurs in order to take a distribution.

The IRS provides guidance on MEPs through its IRS Internal Revenue Manual, Part 7, Chapter 11, Section 7 (Section 6 discusses multiemployer plans). IRS FAQs also address frequent questions the IRS receives.

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HWC Contributed by Joanne Szupka and Chelsea Smith Brantley

There’s no doubt about it – how we communicate (HWC) benefit information to employees can be challenging. According to a recent study released by the International Foundation of Employee Benefit Plans (IFEBP), 65% of the employers noted employee benefit education is a high priority[2] for their organization. Despite prioritizing such education, only 19% of the respondents indicated their employees have a high level of understanding regarding employee benefits. This low level of understanding may be linked to employees not opening or reading employer communication materials as 80% of the employers surveyed cited this as a problem. Clearly, there is a communication gap.

Communicating with employees about available benefits (whether retirement, medical or other) is a key responsibility of Human Resource personnel. Earlier this year, we conducted our own survey as to how people prefer to receive their information. Here is how the results stacked up:
  An overwhelming majority (92%) noted that they prefer email for benefit-related communications whereas only 8% would opt to receive the information via video-conference. Our survey respondents voted down other methods of communication, such as in-person, over the phone, Skype or text.

Of course, how such information is communicated is only one component of effective benefit plan communications. Here are three critical mistakes typically found in benefits communication and how to fix them:

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LUFTR Contributed by Darlene Bayardo and Chelsea Smith Brantley 
Here are some of the Latest Updates From The Regulators (LUFTR):
  Hurricanes Harvey and Irma Relief Due to the impact of Hurricanes Harvey and Irma, government agencies have announced relief measures, several of which directly impact employee benefit plans as highlighted below:
  • The IRS has granted relief to impacted taxpayers, which includes the postponement of several tax filing and payment deadlines.  The relief provides an automatic extension of time to file certain tax returns through January 31, 2018. This includes taxpayers who had a valid extension to file their 2016 returns (including Form 5500) through October 16, 2017.
  • The IRS also announced that employer-sponsored retirement plans can make participant loans and hardship distributions available to participants and certain members of their families who live or work in the affected disaster areas designated for individual assistance by the Federal Emergency Management Agency (FEMA). It relaxes procedural and administrative rules that normally apply to participant loans and hardship distributions, including the abatement of the six-month ban on employee contributions following the hardship distribution. This relief also allows individuals who live outside the disaster area to take a loan or hardship distribution to assist family or other dependents who live or work in the disaster area. However, the IRS has stressed that the tax treatment of such loans and distributions remains unchanged. The relief is available through January 31, 2018.
  • The PBGC has announced it is waiving late premium payment penalties and extending certain other deadlines for affected plans. The PBGC’s announcement provides information on the disaster relief, including which plans are eligible and how to make a claim for relief.
  • The AICPA has extended the public comment period on the proposed Statement on Auditing Standards (SAS), Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA from the original deadline of August 21, 2017, to September 29, 2017. As discussed in our Spring 2017 edition, there are significant proposed changes in the Exposure Draft. Responses should be submitted to Sherry.Hazel@aicpa-cima.com.

  • The IRS issued a memorandum in April 2017 to the Employee Plans (EP) staff confirming that a cash balance formula based on only a portion of the participant’s annual compensation can meet the “definitely determinable” requirement so long as the formula is not subject to employer discretion under the plan provisions. The memorandum states that, if a plan provides for employer discretion to determine the portion of compensation taken into account, that plan violates the “definitely determinable” rule and therefore the plan will not be treated as a qualified plan for tax purposes. On the other hand, if the plan terms do not allow for employer discretion, benefits will be considered “definitely determinable” even though the employer may have the inherent ability to determine the amount of compensation. Sponsors of cash balance plans should assess the cash balance formulas to ensure they meet the “definitely determinable” requirement under this guidance.

  • The IRS released Notice 2017-37 in June 2017, which provides the Cumulative List of Changes in Plan Qualification Requirements for Pre-Approved Defined Contribution Plans for 2017. This list identifies updates in the qualification requirements of the IRC, which must be incorporated in plan documents submitted to the IRS when requesting an opinion letter through the pre-approved plan program.

  • IRS Revenue Procedure 2017-41 released July 2017, outlines revised IRS procedures regarding issuance of opinion letters on qualification of pre-approved plans and discusses the elimination of separate pre-approved letter programs for volume submitter and master and prototype programs through the creation of a single opinion letter program. The Rev. Proc. is intended to encourage employers to switch from individually designed plans to pre-approved plans and is effective October 2, 2017.

  • In July 2017, the IRS released Rev. Proc. 2017-43, which includes changes to the existing procedures for a suspension of benefits under a multiemployer defined benefit pension plan that is in “critical and declining status.” The Rev. Proc. must be followed and is effective for applications submitted to the Treasury Department for approval of a suspension of benefits on or after September 1, 2017.

  • As discussed in our Spring 2017 edition, the IRS recently issued guidelines for substantiating safe-harbor hardship distributions from 401(k) and 403(b) retirement plans. The IRS hosted a podcast in July 2017, that addressed guidelines provided to IRS agents who audit plans on how to review hardship distributions where sponsors have elected to use the “summary substantiation” method. The discussion highlighted that plan sponsors and third party administrators should review the guidelines in conjunction with plan procedures and processes when setting plan procedures. A recording of the podcast is available at https://www.stayexempt.irs.gov/Home/Resource-Library/Retirement-Plan-Resources.


  • The DOL’s fiduciary rule currently has a phased-in transition period (with respect to the rule’s specific disclosures and representations) that ends January 1, 2018. The DOL recently requested information from the public regarding the rule, including whether the compliance date should be delayed. It has now asked the Office of Management and Budget for a delayed compliance deadline of 18 months until July 1, 2019. In the request, the DOL noted that it is contemplating lessened restrictions on the types of transactions permitted under the rule, which affects certain insurance products and rollovers of IRAs.

  • In August 2017, the DOL issued FAQs explaining the interaction of the fiduciary rule with the 408(b)(2) service provider fee disclosure rules. The FAQs address:

    • The impact of the fiduciary rule on 408(b)(2) disclosures as covered service providers who provide (or expect to provide) fiduciary services are generally required to affirm whether they are acting as a fiduciary.

    • Whether recommendations to participants or IRA owners to contribute or increase contributions to a plan or IRA constitute fiduciary investment advice.

    • Whether recommendations to employers and other plan fiduciaries on plan design changes intended to increase plan participation and plan contribution rates constitute fiduciary investment advice.


The Public Company Accounting Oversight Board (PCAOB) has adopted a new auditing standard, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, that applies to audits conducted under PCAOB standards, including audits of employee benefit plans that file an annual report with the Securities and Exchange Commission on Form 11-K.

The new standard includes a requirement for the auditor's report to disclose the tenure of an auditor, specifically the year in which the auditor began serving consecutively as the entity's auditor. In addition, it will also include the phrase, "whether due to error or fraud," in describing the auditor's responsibility under PCAOB standards to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements.

Plans subject to filing a Form 11-K are exempt from the requirement to include a discussion of the critical audit matters[3] (CAMs) in the auditor’s report, but may choose to do so voluntarily. The standard is effective for audits for fiscal years ending on or after December 15, 2017.

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Events, People and Places Society for Human Resource Management (SHRM) Annual Conference and Exposition

EBP Assurance and Tax professionals, Grand Rapids Assurance Director Luanne MacNicol (left) and ERISA National Practice Leader and Specialized Tax Services Managing Director Kim Flett (right) attended the national SHRM conference in New Orleans, Louisiana in June, 2017. Representing BDO at the executive booth with the theme “We’ve Got You Covered,” Luanne, Kim and other BDO professionals met with attendees from all over the world. Employee benefit plans were the topic of discussion with matters ranging from plan audits, compliance reviews, plan design and other benefits administration. This important conference provided an opportunity to demonstrate BDO’s skilled knowledge and expertise in the many complex areas of employee benefit plans.

  Meet BDO’s National Practice Leader for Employee Benefit Plan Audits

Beth Garner leads BDO’s National Employee Benefit Plan audit practice. A partner in BDO’s Atlanta office, she is actively involved in EBP activities within both the firm and various industry and professional organizations, including the AICPA Employee Benefit Plan Audit Quality Center Executive Committee. Beth brings a depth of experience as a long-time EBP auditor as well as a client’s perspective on the challenges facing plan sponsors from her prior private industry career experience. Through her leadership, BDO continues to pursue excellence in both audit quality and client service.

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Our EBP Center of Excellence is dedicated to assisting plan sponsors in addressing their various EBP needs. For more information on BDO’s EBP services, please contact a member of our practice leadership:

Beth Lee Garner
National Practice Leader      Luanne MacNicol, Grand Rapids
Central EBP Regional Leader   Darlene Bayardo
National Assurance   Wendy Schmitz, Charlotte
Atlantic EBP Regional Leader   Mary Espinosa, Orange County
West EBP Regional Leader   Joanne Szupka, Philadelphia
Northeast EBP Regional Leader   Jody Hillenbrand, San Antonio
Southwest EBP Regional Leader   Jam Yap, Atlanta
Southeast EBP Regional Leader    

[1] RMDs may be taken on an annual basis. Additionally, as the name implies, these distributions are just minimums; a participant may be eligible to take additional distributions, if desired.
[2] https://www.ifep.org/pdf/benefits-communication-survey-results.pdf
[3] These are matters that have been communicated to the audit committee, are related to accounts or disclosures that are material to the financial statements, and involve especially challenging, subjective, or complex auditor judgment.

Relief Measures Impacting Employee Benefit Plan Sponsors

Fri, 09/15/2017 - 12:00am
In response to Hurricanes Harvey and Irma, the IRS announced that employer-sponsored retirement plans can make participant loans and hardship distributions available to participants and certain members of their families who live or work in the affected disaster areas designated for individual assistance by the Federal Emergency Management Agency (FEMA) – relaxing procedural and administrative rules that normally apply to participant loans and hardship distributions, including the abatement of the six-month ban on employee contributions following the hardship distribution.
This relief also allows individuals who live outside the disaster area to take a loan or hardship distribution to assist family or other dependents who live or work in the disaster area. However, the IRS has stressed that the tax treatment of such loans and distributions remains unchanged. The relief is available through January 31, 2018.
The Department of Labor has issued compliance guidance for impacted plans and FAQs for affected participants and beneficiaries.
The Pension Benefit Guaranty Corporation (PBGC) has announced it will waive late premium payment penalties and extending certain other deadlines for affected plans. The PBGC’s announcement provides information on the disaster relief, including which plans are eligible and how to make a claim for relief.
BDO Disaster Response In an effort to help to those impacted, government agencies have announced relief measures, from tax extensions and hardship distributions to tax-exempt employer assistance, and even guidance on cyber threats related to hurricane relief.
  Learn More

FASB Flash Report - September 2017

Fri, 09/15/2017 - 12:00am
FASB Issues Targeted Improvements to Hedge Accounting

Download PDF Version

Summary The FASB recently issued ASU 2017-12[1] to improve its hedge accounting guidance. This new standard simplifies and expands the eligible hedging strategies for financial and nonfinancial risks. It also enhances the transparency of how hedging results are presented and disclosed. Further, the new standard provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in earnings. The ASU is available here, and becomes effective for public companies in 2019 and all other entities in 2020. Early adoption is permitted.
  Background Topic 815[2] governs the accounting for derivative instruments and provides an option to elect hedge accounting. Historically, the conditions to apply hedge accounting have been quite stringent.

ASU 2017-12 more closely aligns hedge accounting with a company’s risk management activities and simplifies its application through targeted improvements in key practice areas. This includes expanding the list of items eligible to be hedged and amending the methods used to measure the effectiveness of hedging relationships. These changes are intended to allow preparers more flexibility. In addition, the ASU prescribes how hedging results should be presented and requires incremental disclosures.
  Main Provisions Expansion of Risks Eligible to be Hedged

Financial Risk Components
Under current GAAP, a hedge of interest-rate risk is only allowed for specific benchmark interest rates, i.e., LIBOR, US Treasury and the OIS rates. The ASU amends this guidance to allow other interest rates to be hedged:
  • For cash flow hedges, the concept of benchmark interest rates was eliminated. Instead, an entity can hedge any contractually specified interest rate. Therefore, variability in cash flows attributable to the prime rate or any other explicitly specified rate can now be hedged.
  • For fair value hedges, the concept of benchmark interest rates was retained. However, the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate was added to the list of eligible US benchmark interest rates mentioned above.
Nonfinancial Risk Components
  • Similar to the amendments for cash flow hedges of interest-rate risk, the ASU permits an entity to hedge the variability in cash flows attributable to changes in any contractually specified component of a nonfinancial asset. For instance, an entity may hedge just the rubber component of forecasted tire purchases instead of the entire purchase price.
Simplified Application of Interest-Rate Risk in Fair Value Hedges
To simplify and better align fair value hedges of interest-rate risk in a debt instrument with an entity’s risk management strategy, the ASU permits an entity to:
  • Measure the change in fair value of the hedged item considering only the hedged benchmark interest rate component, instead of the full contractual coupon (including credit spread).
  • Measure the hedged item by assuming it has a term that reflects only the designated cash flows being hedged, e.g., the first 3 years of a 7 year note, which was not permitted in the past for fair value hedges.
  • Consider how changes in only the hedged benchmark interest rate will affect a decision to settle a prepayable financial instrument before its scheduled maturity, and not credit or other extraneous factors, in calculating the change in fair value of the hedged item.
  • Use a “last-of-layer” method in hedging certain portfolios of prepayable financial assets. As such, prepayment risk is not incorporated into the measurement of the hedged item as that bottom layer is not expected to be affected by prepayments.
Elimination of the Separate Measurement and Recording of Hedge Ineffectiveness
The ASU eliminates the concept of hedge ineffectiveness for financial statement recognition purposes. While the hedging relationship still has to be highly effective in order to apply hedge accounting, the ineffective portion of the hedging instrument is no longer required to be recognized currently in earnings or disclosed. As such,
  • For cash flow and net investment hedges, all changes in the fair value of the hedging instrument (i.e., both the “effective” and “ineffective” portions) will be deferred in other comprehensive income and recognized in earnings at the same time that the hedged item affects earnings.
  • For fair value hedges, the entire fair value change of the hedging instrument is presented in the same income statement line that includes the hedged item’s impact on earnings.
Simplifications Related to Effectiveness Assessments and Related Hedge Documentation
The ASU includes other simplifications to hedge effectiveness assessments and the related hedge documentation:
  • If certain conditions are met, an entity may elect to perform the subsequent quarterly hedge effectiveness assessments qualitatively even if a quantitative test (e.g., regression) was required to be performed at hedge inception.  
  • An entity may assume that the hedging derivative’s maturity date and the occurrence of the forecasted transactions (e.g., forecasted sales) match if they occur within the same 31-day period or fiscal month.
  • The timing of the initial prospective quantitative hedge effectiveness test is extended up to the first quarterly effectiveness assessment date for all entities.
  • As additional relief, certain private companies and not-for-profit entities may select the method of assessing hedge effectiveness, and perform both the initial effectiveness test and all subsequent quarterly hedge effectiveness assessments before the date on which the next financial statements are available to be issued. They are required to document only the hedging instrument, the hedged item or transaction, and the nature of the risk being hedged contemporaneously at hedge inception.
  • An entity that applies the qualitative shortcut method for assessing hedge effectiveness but later determines this method to be inappropriate is allowed to change to a specified quantitative “long-haul” method (e.g., regression) without dedesignating the hedge, so long as that long-haul method was documented at inception.
Improvements to Presentation and Disclosure
The ASU establishes the following presentation and disclosure requirements:
  • Requires presentation of the earnings effect of the hedging instrument in the same income statement line item as the hedged item (e.g., amounts deferred in other comprehensive income for cash flow hedges of interest rate risk will be reclassified to interest expense).
  • Requires new tabular disclosures related to the cumulative basis adjustments for fair value hedges; and
  • Amends current tabular disclosures related to the effect on the income statement of fair value and cash flow hedges.
  Effective Date and Transition For public business entities, the ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020.

Early application is permitted in any interim period after issuance of the ASU for existing hedging relationships on the date of adoption. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption (that is, the initial application date).

The transition section of the ASU specifies the following:
  • For cash flow and net investment hedges existing at the date of adoption, elimination of the separate measurement and recording of ineffectiveness should be applied through a cumulative-effect adjustment to accumulated other comprehensive income with a corresponding entry to the opening balance of retained earnings.
  • The amended presentation and disclosure guidance is required only prospectively.
  • Certain beneficial transition elections (e.g., amending hedge documentation to indicate that subsequent hedge effectiveness assessments will be performed qualitatively; documenting the alternative “long-haul” method that will be applied if the shortcut method is determined to be inappropriate; etc.) may be made upon adoption.
  On the Horizon BDO will host a webcast on the key amendments later this fall and details will be provided in advance.  

For questions related to matters discussed above, please contact Gautam Goswami or Adam Brown.
    [1] Targeted Improvements to Accounting for Hedging Activities [2] Derivatives and Hedging

SEC Flash Report - September 2017

Wed, 09/13/2017 - 12:00am
SEC Staff Guidance Updates In August, the staff of the SEC’s Division of Corporation Finance (the Division) updated its guidance contained in a recent staff announcement, the Division’s Financial Reporting Manual (FRM),[1] and certain Compliance and Disclosure Interpretations (C&DIs) on Securities Act forms.  
The staff supplemented the Division’s June 29, 2017 announcement that it would make the confidential submission process (i.e., submission of a draft registration statement for nonpublic review) available to an expanded class of issuers and transactions.[2]  The supplemented announcement clarifies that:
  • The nonpublic review process is available for:
    • Securities Act registration statements prior to the issuer’s initial public offering date;[3]
    • Securities Act registration statements within one year of the IPO; and
    • The initial registration of a class of securities under Exchange Act Section 12(b) on Form 10, 20-F or 40-F.
  • An issuer that has publicly filed its registration statement and otherwise qualifies for the nonpublic review process may switch to the nonpublic review process for future pre-effective amendments to its registration statement (the draft amendments must subsequently be made public, the timing of which is specified in the announcement and depends on the nature of the registration and offering).
  • Issuers may submit any questions about their eligibility to use the expanded processing procedures contained in the announcement to CFDraftPolicy@sec.gov

The staff also updated its C&DIs related to the circumstances in which financial statements may be omitted from registration statements.  Whether financial statements may be omitted depends on whether (1) the registrant is an emerging growth company (EGC) or not, (2) the financial statements are annual or interim financial statements, and (3) the document is a confidential draft submission or a publicly filed registration statement. 
  • C&DI 101.04 now states that EGCs may omit interim financial information from draft registration statements that they reasonably believe they will not be required to present separately at the time of the offering.  Previously, EGCs were not permitted to omit interim financial statements from their filed or draft registration statements if the interim period relates to an annual period required at the time of the offering.  
For example, under the staff’s new policy, a calendar year-end EGC that submits a draft registration statement in November 2017 and reasonably believes that it will commence its offering in April 2018 (when annual financial information for 2017 will be required) may omit its 2015 annual financial information and the nine-month interim financial statements for 2016 and 2017 because this information will not be required at the time of the offering in April 2018.  However, if this same EGC publicly files the registration statement in January 2018, it must include the nine-month interim financial statements for 2016 and 2017 because they relate to annual periods that will be required at the time of the offering.  The staff made conforming updates to the FAST Act C&DIs to reflect this change (see Question 1).
  • C&DI 101.05 now states that non-EGCs may also omit interim financial statements from draft registration statements that they reasonably believe will not be required to be included at the time the registration statement is publicly filed.  Non-EGCs are not permitted to omit any interim or annual financial information at the time the registration statement is publicly filed. 
For example, a calendar year-end non-EGC that submits a draft registration statement in November 2017 and reasonably believes it will first publicly file in April 2018 when annual financial information for 2017 will be required may omit from its draft registration statements its 2014 annual financial information and interim financial information related to 2016 and 2017 because this information would not be required at the time of its first public filing in April 2018. 

In summary, based on the staff policies about the required financial statements in draft and publicly filed registration statements:
    Draft Registration Statements Publicly Filed Registration Statements EGCs -May omit annual and interim periods that will not be required to be presented separately at the time of the offering. -May omit annual periods that will not be required at the time of the offering.
-May not omit interim periods that relate to annual periods required at the time of the offering.  Non-EGCs -May omit annual and interim periods that will not be required to be presented separately at the time of the public filing. -May not omit annual or interim periods at the time of the public filing. 
In addition to the staff guidance above, the staff published an update to the FRM.  The inside cover of the FRM lists a summary of the paragraphs that were updated.  The update:
  • Adds a new section to the FRM which precedes the table of contents and describes how registrants may communicate with the Division’s Office of the Chief Accountant (CF-OCA) when requesting reporting relief under S-X Rule 3-13, answers to interpretive letter requests or informal interpretive advice, or help to explain the SEC rules, regulations, forms and guidance. 
  • Amends Section 2065 to clarify that registrants may request permission from CF-OCA to provide abbreviated financial statements in lieu of full financial statements for an acquired business that is identified as a predecessor of the registrant.  Previously, the FRM indicated that Section 2065 of the FRM did not apply if the business acquired represents the predecessor of the registrant. 
  • Conforms paragraphs 10220.1 and 10220.5 of the FRM to the C&DIs discussed above with respect to the omission of certain financial information in draft and filed registration statements.
For questions related to matters discussed above, please contact:   Jeff Jaramillo
National Partner
SEC Services Practice Paula Hamric
National Assurance Partner
    [1] The FRM is an internal SEC staff reference document that provides general guidance covering several SEC reporting topics. While the FRM is not authoritative, it is often a helpful source of guidance for evaluating SEC reporting issues. [2] Further details regarding the initial announcement are available in our BDO flash report. [3] The “initial public offering date” is the date of the first sale of common equity securities pursuant to an effective registration statement under the Securities Act of 1933.   

2017 BDO Board Survey

Mon, 09/11/2017 - 12:00am

Explore the 2017 BDO Board Survey:  
The responsibilities of corporate directors at publicly traded companies continue to change and grow every year. Responding to recent regulatory changes, dealing with activist shareholders, assessing the impact of new financial reporting requirements and contingency planning for long-anticipated tax reform are just a few of the issues that boards need to manage in 2017.

The BDO Board Survey, conducted annually by the Corporate Governance Practice of BDO USA, was created to act as a barometer to measure the attitudes of public company directors on these and other governance issues. The 2017 BDO Board Survey, conducted in August of 2017, examines the opinions of 130 corporate directors of public company boards.
  “The 2017 BDO Board Survey shows corporate directors are eagerly awaiting the tax reform promised by President Trump, but they seem resigned to the fact that it may not happen in 2017. They also have a high degree of confidence in their internal compliance programs, despite some widely publicized examples of businesses failing to respond to whistleblowers,” said Amy Rojik, BDO USA’s National Partner for Communications and Governance

“Directors are also focusing more fully on engaging with management in addressing major accounting changes that will be implemented over the next several years and are much more favorable towards disclosures of sustainability matters than they were a year ago.” 
Tax Reform  It has been more than 30 years since the United States signed major tax reform into law. Although there has yet to be a bill introduced providing specifics on how exactly the White House and the Republican-controlled Congress intend to achieve it, President Trump has continued to indicate tax reform is a priority in 2017. 
Public company board members are clearly rooting for such reform.

More than three-quarters (78%) of public company board members anticipate tax reform will be achieved during President Trump’s current four-year term, but just 22 percent believe it will occur in 2017. Of those predicting tax reform, an overwhelming majority (94%) anticipate that it will have a favorable impact on their business, with 20% believing the impact will be highly favorable. 

When asked the most important goal for tax reform legislation, sizable proportions of board members cite reduction of the current corporate tax rate (45%) and simplification of the tax code (37%). Smaller numbers communicated the need for tax incentives to repatriate foreign earnings (12%) or lowering the capital gains tax rate (5%).

  BDO Food for Thought

BDO explores these and other tax reform issues in a series of thought pieces and educational events designed to keep you informed as to developments that may impact your businesses. To learn more, review BDO’s 2017 BDO Tax Outlook Survey and our archived webinars: Trump, Legislation and Taxes: How the Expected Tax Reform May Impact Global Organizations and How Tax Reform Proposal Could Impact Executive Compensation. Evolving issues are further discussed in recent International Tax Alerts available here and here.

  “Corporate board members are correct in believing that tax reform, with a goal of simplicity and fairness, is achievable and, in theory, in the interests of both political parties. Unfortunately, the need to pass the 2018 budget, deal with the deadline on raising the debt ceiling and overcoming the divisions that defeated healthcare legislation will make tax reform a tall order for 2017,” said Matthew Becker, Leader of BDO USA’s National Tax Office. “If Democrats and Republicans can push aside special interests and focus on helping their constituents - not opposing each other’s ideas – tax reform can be achieved. It just may take additional time.” 
Financial Reporting Changes  The Public Company Accounting Oversight Board (PCAOB) recently approved changes to the annual auditor’s report that accompanies a business’s financial statements. One of the major changes is a requirement for the auditor’s report to discuss “critical audit matters” (CAMs) – elements of the audit, discussed with the audit committee, where the auditor had to make the most challenging, subjective or complex judgements on material matters. 

When asked their opinion of this change, close to half (48%) of corporate board members do not feel the discussion of CAMs is an improvement to the transparency and usefulness of the auditor’s report for investors. Just over one-third (36%) of the directors believe it is an improvement and 16 percent were not sure. 

Directors were evenly split (50%) on whether the discussion of CAMs in sensitive areas could make their job as a board member more difficult.

  BDO Food for Thought

Changes to U.S. auditor reporting enacted under PCAOB Audit Standard (AS) 3101 have been on the radar for quite some time and follow significant similar changes previously enacted by auditing standard-setters in the UK; Australia; and the Netherlands and now to be implemented more broadly under the International Auditing and Assurance Standards Board (IAASB) International Standards on Auditing (ISA) 701, effective for audits performed in 2017. Refer here for a comparison of the IAASB and PCAOB rule.

While PCAOB AS 3101 has staggered effective dates beginning in FY2018 and extended through FY20211, companies are strongly advised to use the current period audit cycles to dialogue with their auditors early as to what significant changes to their financial reporting may look like. The Financial Reporting Commission in the UK has recently released a report that examines the evolution of the enacted auditor reporting over the past two years that U.S. companies may reference as they prepare for the adoption of AS 3101.


“While Board members are not enamored with the additional disclosure and discussion of critical audit matters in the new auditor’s report, this change has been coming for a few years and we anticipate they will make this adjustment and it could lead to better auditor – client communications,” said Phillip Austin, BDO USA’s National Managing Partner for Auditing“We are working closely with our clients and engagement teams to educate and drive development of meaningful CAMs to be shared publicly should the SEC approve the PCAOB’s changes to the auditor’s report.”

With a continued drum beat of reminders by regulators as to implementation-readiness, better than three-quarters (82%) of directors indicate that their board or audit committee is actively working with management to meet historic accounting changes to revenue recognition, lease accounting and credit loss standards that are going into effect over the next few years. 

Almost as many (74%) say they are engaged with management on the need to communicate with shareholders, regulators and other stakeholders on the potential impact of these accounting changes in order to avoid potential surprises when they appear on the financial statements.

“Implementation efforts have started to accelerate lately, which may reflect board member focus on the way these new standards will impact financial statements. Communicating these changes to investors will be a key focus area moving forward,” said Adam Brown, BDO USA’s National Partner for Accounting.    BDO Food for Thought

A recent BDO alert focuses on SEC staff reminders issued to public companies with respect to SAB 74 disclosures and controls related to new accounting standards. Further, in public statements made by SEC Chief Accountant Wes Bricker,2 companies are urged to move quickly toward implementation and are reminded about the importance of disclosing the anticipated impact of adopting new accounting standards and plans for transition. Bricker, while acknowledging progress, indicated that both investors and the SEC staff “will be looking for increased disclosures throughout 2017 about the significance of the impact – whether quantitative or qualitative – of revenue recognition, among other new standards… Particularly for companies where implementation is lagging, preparers, their audit committees and auditors should discuss the reasons why and provide informative disclosures to investors about the status so that investors can assess the implications of the information.”

To aid in this effort, BDO encourages boards and their audit committees to review the Center for Audit Quality’s (CAQ) Preparing for the New Revenue Recognition Standard: A Tool for Audit Committees along with CAQ Alert No. 2017-03: SAB Topic 11.M – A Focus on Disclosures for New Accounting Standards.

Sustainability Matters  Earlier this year, President Trump withdrew the United States from the Paris Climate Accord, the global coalition meant to curb emissions that may be a causal factor of climate change. Numerous multinationals – including General Electric, Dow Chemical, Royal Dutch Shell, Exxon Mobil and Apple – were critical of the decision for numerous reasons. 

Some are trying to be responsive to shareholder demands to curb greenhouse-gas emissions, while others operate in states and countries that are putting in place climate rules and thus face pressures beyond the U.S. government. Moreover, many companies didn’t want the U.S. to cede leadership on renewable energy.

When asked about President Trump’s decision to withdraw the United States from the Paris Climate Accord, corporate directors were split, with a narrow majority (54%) indicating they were against the decision. 

On a related matter, shareholders are increasingly calling for more disclosure on businesses' sustainability efforts. In May, close to two-thirds of Exxon Mobil shareholders approved a proposal to require the company to measure and disclose how regulations to reduce greenhouse gases and new energy technologies could impact the value of its oil assets. 

Other shareholder groups have expressed similar interest in increased disclosures on sustainability matters (e.g. climate change, corporate social responsibility, etc.) and corporate directors have become increasingly receptive to the issue of providing sustainability metrics in financial statements.

In a major reversal from a year ago, a majority (54%) of board members believe that disclosures regarding sustainability matters are important to understanding a company’s business and helping investors make informed investment and voting decisions. Last year, just one-quarter (24%) of directors maintained this stance. 

  “President Trump’s decision to pull the U.S. out of the Paris Climate Accord put climate change and sustainability matters in the spotlight earlier this year. Regardless of where you stand on that decision, businesses are becoming increasingly focused on sustainability and how to incorporate it into their financial reporting,” said Christopher Tower, BDO USA’s National Managing Partner for Audit Quality and Professional Practice. “When you consider that intangible assets can account for a majority of the market value of a company, shareholders, analysts and other stakeholders need to understand ‘non-financial factors’ that are impacting a business’s value.”   BDO Food for Thought

Voluntary organizational sustainability reports continue to grow in interest and popularity globally, particularly as Directive 2014/95/EU becomes the law of the land as mandatory reporting for certain companies in Europe. Such reporting is designed to disclose information about the non-financial economic, environmental and social impacts resulting from the organization’s everyday activities. Such reports communicate the specific values and principles the organization adheres to along with its framework for governance in linking corporate strategy and commitment to a sustainable global economy and can serve as a differentiator in the marketplace.

Sustainability has also been on the SEC’s radar. In 2016, the SEC included questions regarding sustainability and public policy issues within its Concept Release related to business and financial disclosure required by Regulation S-K. With the onboarding of new SEC Chairman Jay Clayton and two new SEC commissioners still to be appointed, it remains to be seen whether sustainability will be on the new regime’s agenda aimed at protecting main street investors.

Whistleblower/Compliance Programs  The Wells Fargo fake accounts scandal and reports of widespread employee harassment at Uber and Fox News have been major news stories in 2017. In each instance, employees alleged that they communicated concerns about the problems, but their concerns were ignored.

Despite these reports of corporations failing to act when whistleblowers communicated concerns through internal compliance programs, the vast majority (93%) of board members say they receive regular reports from management, or an internal compliance executive, on whistleblower complaints and how they are being addressed. 

An almost identical percentage (92%) indicate they ask management what they are doing to communicate with employees throughout the organization about the importance of adherence to ethical standards.

The number of whistleblower tips received by the SEC in FY2016 was over 4,200 – up 40% from the FY2012 inception of the Dodd-Frank SEC Whistleblower Rules.3 The SEC logged 868 enforcement actions in FY2016 with penalties and disgorgements recorded at approximately $4 billion. Additionally since the inception of the SEC’s program, over $158 million has been awarded to whistleblowers. According to the SEC, almost 65% of award recipients were insiders of the entity on which they reported information of wrongdoing to the SEC. 

When corporate directors were asked whether the SEC’s widely publicized whistleblower bounties – enacted in 2011 – have undermined their internal whistleblower/compliance program, only a third (32%) agreed. This is a major shift from 2012 when a slight majority (51%) of the directors believed the SEC’s newly enacted bounties could undermine internal anti-fraud and compliance programs.
    “When the SEC’s whistleblower program was first introduced in 2011, there was great concern among corporate boards and compliance officers that the bounties could undermine the internal compliance programs that they had recently put in place. This year’s Board Survey demonstrates that the attitudes of corporate directors on this topic have changed considerably,” said Glenn Pomerantz, Leader of BDO USA’s Global Forensics Practice. “Board members have clearly become more comfortable with and confident in the compliance programs that they have implemented in recent years. They view the news reports of compliance failures as exceptions to the rule that can be used to educate and reinforce the benefits of strict adherence to their programs.”

  “Organizations and underlying capital markets are best served by directors who reinforce their corporate cultures by setting no tolerance expectations for ethical breaches and who demonstrate commitment to such through continual engagement with management and communication to all levels of employees,” said Jeff Jaramillo, BDO USA’s National Partner for SEC Services. “The SEC has commented extensively on this and we are heartened that directors are clearly invested in anti-fraud and compliance oversight.”   BDO Food for Thought

Even organizations with the most robust anti-fraud compliance policies and procedures are still susceptible to fraud. The SEC has encouraged directors to not only support internal whistleblowers and take all claims seriously but also to consider the favorability that could result from a company’s self-reporting of suspected fraud that is brought to its attention.4

Activist Investors 

Shareholder activism – whether through formal proxy voting or informal requests to dialogue with management - remains an emerging area of corporate governance focus. 

When asked about the rise of “activist investors” seeking to control board seats and impact corporate strategy, directors are clearly unified in their opposition to such efforts. The vast majority (95%) feel activist investors are too focused on short-term returns to secure their investments. Only five percent of board members believe that these activists are trying to unlock long-term shareholder value. 

BDO Food for Thought

Activism affects companies of all sizes and industries and is particularly relevant for small- and mid-cap companies where companies $100M-$1B (44% of total companies) accounted for approximately 60% of all activist targets in FY2016.5 Activism can help focus on and drive enhanced corporate governance. However, many worry that activist proposals may be too short-term in thought and undermine the more strategic thinking that will sustain a company and create value in the long term. At a minimum, boards need to be well-versed in shareholder perceptions of their organizations and be prepared respond to activist challenges.

Board Composition  The SEC has begun to look into existing company disclosures of the ethnic, racial and gender composition of public company boards and could make such disclosures a mandatory requirement in the future. 

Although two-thirds (66%) of directors believe their board is already proactively addressing the issue of board diversity, one-third (34%) of board members admit they are falling short in this area.

  BDO Food for Thought

Succession planning for boards should examine the evolving needs of an organization and incorporate a review of the board’s mix of skill sets, diversity of thought, and ability to act independently in the best interest of the organization. The National Association of Corporate Directors' (NACD) 2016 Blue Ribbon Commission Report Building the Strategic-Asset Board covers some key considerations in this area. BDO has further examined sound governance practices in this area during our Director Diversity – Striking the Right Balance in the Boardroom webinar.

  “Activist proposals, particularly those suggesting changes in board composition to achieve specific desired outcomes, should be viewed as an opportunity for the board to self-reflect and consider thoughtfully the needs and concerns of its shareholders while assessing how those concerns tie into the underlying objectives of the organization’s goals and strategies,” said Amy Rojik. “This, combined with timely reviews as to the adequacy of board composition through the lens of diversification and independence, can be a powerful tool for a board in carrying out its oversight responsibilities.”
BDO Board Survey These are just a few of the findings of the 2017 BDO Board Survey, conducted by the Corporate Governance Practice of BDO USA in August 2017. The annual survey examines the opinions of 130 corporate directors of public company boards regarding corporate governance and financial reporting issues. 

BDO USA’s Corporate Governance Practice is a valued business advisor to corporate boards. The firm works with a wide variety of clients, ranging from entrepreneurial businesses to multinational Fortune 500 corporations, on myriad of accounting, tax, risk management and forensic investigation issues.
Corporate Governance Practice Leaders: 
  Amy Rojik   Jay Duke   Christopher Tower   Stephanie Giammarco   Phillip Austin   Paul Heiselmann   Matthew Becker   Jeff Jaramillo   Adam Brown   Glenn Pomerantz  
1 Certain provisions – report format, auditor tenure, and other information – are effective for audits for fiscal years ending on or after 12/15/2017; while communication of CAMs for audits of large accelerated filers are effective for audits of fiscal years ending on or after 12/15/2019 and all other public companies for audits of fiscal years ending on or after 12/15/2020.

2 Refer to SEC Chief Accountant Wes Bricker’s remarks before the May 2017 Baruch College Financial Reporting Conference and additional remarks made during the December 2016 AICPA National Conference on Current SEC and PCAOB Developments.

3 Refer to the SEC’s 2016 Annual Report to Congress on the Dodd-Frank Whistleblower Program.

4 Refer to former SEC Chair Mary Jo White speech at Stanford University Rock Center for Corporate Governance 20th Annual Standard Directors’ College. 

5 Refer to Sullivan & Cromwell’s 2016 U.S. Shareholder Activism Review and Analysis that compiled proxy contests and other activist campaign data in 2016 based on an analysis of U.S. companies with a market capitalization of over $100 million.

BDO Comment Letter - PCAOB Rulemaking Docket Matter No. 044

Thu, 08/31/2017 - 12:00am
PCAOB Rulemaking Docket Matter No. 044: Proposed Amendments to Auditing Standards for Auditor's Use of the Work of Specialists

BDO is supportive of strengthening the requirements for evaluating the work of a company's employed or engaged specialist, including the application of a risk based supervisory approach to the use of specialists as the use of the work of specialists has grown and has become an essential component in many audits.

BDO Comment Letter - Proposed Accounting Standards Update

Thu, 08/31/2017 - 12:00am
Proposed Accounting Standards Update, Targeted Improvements to Related Party Guidance for Variable Interest Entities (File Reference No. 2017-240)

BDO supports certain aspects of the proposed simplifications to the VIE guidance, but recommends maintaining the current "related-party tiebreaker" test.

BDO Comment Letter - PCAOB Rulemaking Docket Matter No. 043

Thu, 08/31/2017 - 12:00am
PCAOB Rulemaking Docket Matter No. 043: Proposed Auditing Standard - Auditing Accounting Estimates, Including Fair Value Measurements, and Proposed Amendments to PCAOB Auditing Standards

BDO supports the development of a single standard that is aligned with the PCAOB's risk assessment standards and the addition of incremental guidance relating to third-party pricing services.

FASB Flash Report - July 2017

Mon, 07/31/2017 - 12:00am
FASB Simplifies Accounting for Instruments with Down Rounds  Download PDF Version 
Summary The FASB recently issued ASU 2017-11[1] to simplify the accounting for certain financial instruments with down round features. This new standard will reduce income statement volatility for many companies that issue warrants and convertible instruments containing such features. It is available here, and becomes effective for public companies in 2019 and all other entities in 2020.

A down round feature is a contractual term to protect the investor in an equity-linked instrument such as a warrant or convertible debt from declines in the issuer’s share price under certain circumstances. It results in the strike price being reduced on the basis of the pricing of future equity offerings. Down rounds are common in warrants, convertible preferred shares, and convertible debt instruments issued by private companies and development-stage public companies. Under existing GAAP, a down round feature often results in liability classification for a warrant or in bifurcation of a conversion option, which is then remeasured to fair value through earnings each period. Part I of the ASU addresses the accounting for such instruments.

The FASB previously issued an indefinite deferral of accounting requirements in Topic 480[2] for mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. This indefinite deferral resulted in a large amount of pending guidance in Topic 480, making it difficult to read. Part II of the ASU addresses this difficulty.

Main Provisions
Part I of the ASU changes the classification analysis of certain equity-linked financial instruments, such as warrants and embedded conversion features, such that a down round feature is disregarded when assessing whether the instrument is indexed to an entity’s own stock under Subtopic 815-40. As a result, a down round feature—by itself—no longer requires an instrument to be remeasured at fair value through earnings each period, although all other aspects of the indexation guidance under Subtopic 815-40 continue to apply.

For freestanding equity-classified financial instruments, the ASU requires entities that present earnings per share (EPS) to recognize the effect of the down round feature when it is triggered, i.e., when the exercise price of the related equity-linked financial instrument is adjusted downward because of the down round feature. The amount of the EPS adjustment is determined as the difference between the fair value of the instrument immediately before and after the strike price is adjusted. That amount is recorded as a dividend and as a reduction of income available to common shareholders in basic EPS. An entity may also be required to adjust its diluted EPS calculation.
Convertible instruments with embedded conversion options that have down round features will be accounted for under existing specialized guidance for contingent beneficial conversion features in Subtopic 470-20,[3] including the related EPS guidance.
The ASU does not change the accounting for liability-classified financial instruments where classification resulted from a term or feature other than a down round feature.
The ASU requires entities to disclose the existence of down round features in the instruments they issue, when the down round features result in a strike price adjustment, and the amount of any such adjustment.
Part II of the ASU recharacterizes the indefinite deferral of certain provisions of Topic 480 (currently presented as pending content in the Codification) as a scope exception. No change in practice is expected as a result of these amendments.
  Effective Date and Transition For public business entities, the amendments in Part I of the ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of the ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
The amendments should be applied on a full retrospective basis or on a modified retrospective basis through a cumulative adjustment to opening retained earnings in the year of initial application.
The amendments in Part II have no accounting impact and therefore do not have an associated effective date.
For questions related to matters discussed above, please contact:
  Gautam Goswami
National Assurance Partner   Liza Prossnitz
National Assurance Partner   Roscelle Gonzales
National Assurance Director         [1] (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception [2] Distinguishing Liabilities from Equity [3] Debt—Debt with Conversion and Other Options

Corporate Governance Flash Report - July 2017

Mon, 07/24/2017 - 12:00am
New SEC Chairman Clayton Sets Tone for the SEC’s Agenda Focused on Main Street Investors  
Download PDF Version

In his first public speech as SEC Chairman, Jay Clayton lays down guiding principles and several areas of focus for SEC action in the near-term to protect Main Street Investors with an eye toward furthering the SEC’s mission to facilitate capital formation.
  Summary On July 12, 2017, SEC Chairman Jay Clayton gave his first public speech to the Economic Club of New York, offering a look into his views on SEC policy-making and its effects on the U.S. economy. He began by laying out eight guiding principles for the SEC along with several highlighted areas where principles are to be put into practice, particularly in areas that affect “Main Street” investors – individuals within the general population who invest in the capital markets.
  Details Guiding Principles of the SEC
  1. “The SEC’s three-part mission is our touchstone”: To protect investors; to maintain fair, orderly, and efficient markets; and to facilitate capital formation.
  1. “Our analysis starts and ends with long-term interests of the Main Street investor”: Consideration of the impact SEC actions have on “Mr. and Ms. 401(k)” – are they benefitting, are there appropriate investment opportunities, do they have enough information to make investment decisions?
  1. “The SEC’s historic approach to regulations is sound”: There will not be wholesale changes to the three-pronged regulatory architecture – disclosure and materiality; rules applicable to market agents (e.g., exchanges, clearing agencies, broker-dealers, and investment advisors); and anti-fraud and enforcement.
  1. “Regulatory actions drive change, and change can have lasting effects”: Need to consider the cumulative impact that increased disclosure and regulatory burdens have on the notable reduction in the number of U.S.-listed public companies.
  1. “As markets evolve, so must the SEC”: While embracing disruptors of technology and innovation, the SEC must ensure its rules and operations address both the need to change and the cost that is borne by investors.
  1. “Effective rulemaking does not end with rule adoption”: Just as robust processes for obtaining public input and economic analysis are performed at the proposal and adoption stages, enacted rules require retrospective review to ensure they are functioning as intended.
  1. “The costs of a rule now often include the cost of demonstrating compliance”: Need to align the wording of and guidance for rules in recognition of the practical costs – e.g., those to be incurred by companies, third party advisors, and compliance solutions – with the vision of how the rules are intended by the SEC to be implemented.
  1. “Coordination is key”: The SEC must work closely with, between, and among all domestic and international organizations - two specific examples in which coordination is key include governance of over-the-counter derivatives and cybersecurity.
Principles to Practice
In putting these principles into practice, Chairman Clayton focused on five particular areas where he sees opportunities:
  1. Enforcement and Examinations: The SEC will continue to deploy significant resources to detect and deter fraud. Several areas highlighted in his speech include affinity fraud, microcap fraud, pump-and-dump scammers, those who prey on retirees, and sophisticated cyber thieves. Caution, however, was placed on the practice of punishing responsible companies who find themselves victims of cyber-crimes.
  1. Capital Formation: Chairman Clayton has been vocal about addressing the regulatory burdens cited by many private companies who opt to remain private. As a first step, earlier in July, the SEC expanded the JOBS Act approach by opening up the SEC’s Division of Corporate Finance non-public review process to IPO draft registration statements of larger domestic and non-U.S. companies beyond emerging growth companies (EGCs) with an eye to encouraging the prospect of selling shares in the U.S. public markets and doing so at an earlier stage in a company’s development. Another opportunity lies within Rule 3-13 of Regulation S-X which allows companies to request modifications to their financial reporting requirements if they feel certain disclosures are burdensome to generate and may not be material to the total information being made available to investors. 
  1. Market Structure: Promotion of action and review to ensure the equity market structure is optimal. This will include:
  1. A pilot program to test how adjustments to the access fee cap under Rule 610 of the Securities Exchange Act of 1934 would affect equities trading.
  1. Extension of the tenure of the SEC’s Equity Market Structure Advisory Committee (EMSAC), as the EMSAC’s charter is set to expire in August 2017.
  1. Creation of a Fixed Income Market Structure Advisory Committee, akin to EMSAC, to review and advise the SEC as to the efficiency and resiliency of the fixed income products market, as a more stable option for the increasing number of “Baby Boomer” retirees. 
  1. Investment Advice and Disclosures to Investors: Chairman Clayton is looking to specifically review the standards of conduct that investment professionals must follow in providing advice to Main Street investors. Focal points include:
  1. The Department of Labor (DOL) Fiduciary Rule came into effect in early June and expands the investment advice fiduciary definition under the Employee Retirement Income Security Act of 1974 (ERISA). There has been much debate and discussion about the potential impact of this rule. In June, Chairman Clayton requested public input on standards for conduct for investment advisers and broker-dealers to evaluate potential regulatory actions in light of current market activities and risk.
  1. Several initiatives are underway to improve access to meaningful investment information including proposed rulemaking to follow the SEC report issued November 2016 on modernizing and simplifying Regulation S-K disclosure rules.
  1. Resources to Educate Investors: Emphasis on leveraging technology to make a wealth of information available to investors and increase engagement with the SEC including providing resources to investors on how to conduct online background searches on investment professionals.
SEC Chairman Clayton’s full speech is accessible here. For more information and educational opportunities on these and other topics related to audit committee oversight, please visit BDO’s Center for Corporate Governance and Financial Reporting.
For more information, please contact one of the following practice leaders: 
  Paula Hamric   Amy Rojik   Jeff Jaramillo