The Coronavirus pandemic (“COVID-19”) is causing significant financial and operating hardships across all industries. Any companies that are currently preparing GAAP financial statements, including investment companies, should consider whether or not the impact of COVID-19 represents a significant event as defined in FASB Accounting Standards Codification (“FASB ASC”) 855, Subsequent Events.

On December 30, 2019, the SEC proposed amendments to certain independence requirements with the goal of further aligning the auditor’s independence analysis with Rule 2-01’s “reasonable investor” concept.  The concept asks us to consider whether a reasonable investor with knowledge of all the relevant facts and circumstances would conclude that the auditor is capable of exercising objective and impartial judgment?

NSCP Currents, the newsletter of the National Society of Compliance Professionals, recently included an article written by BBD partner Lori Ehleben that originally was published as a blog post of interest to private funds and investment advisors here in Investment Company Notebook.

In this post, we will discuss the rules and mechanics of alternative investment fund tax allocations.  Most alternative investment vehicles are structured as partnerships. Therefore, Subchapter K of the Internal Revenue Code (“IRC”), specifically IRC Section 704, provides the guidance and rules for tax allocations.

The new standard (AS 2501), which is effective for fiscal years ending on or after December 15, 2020, replaces three existing standards relative to auditing accounting estimates. While this replacement implies that much of the content already existed, the PCAOB has adopted this standard because the use of complex accounting estimates and fair value measurements continues to grow. Their oversight activities have revealed a pattern of audit deficiencies in these areas of the audit that are also often some of those areas with the greatest audit risk.

On Wednesday, October 16, 2019, the Financial Accounting Standards Board (“FASB”) unanimously voted to delay effective dates on standards related to accounting for leases, credit losses and hedging.  These delays impact private companies and smaller SEC filers.  The effective dates remain unchanged for larger public entities.

April 2020 Update:

In my original post on answering the question if securities lending fees could be treated as expense offset, my answer to the question was “maybe." This was not a popular answer with my clients as they had competitors who were clearly treating the fees as expense offset.  One of our core values here at BBD is to be a collaborative partner to our clients, within the confines of our professional standards.  While we pride ourselves on being collaborative, this does not mean that we simply try to give our clients the answer that they want to hear.  A big part of being collaborative is providing accurate and correct information to our clients.  This also coincides with our second core value of being authentic. We mean what we say and we say what we mean. Our clients value hearing the truth.  In accordance with these values, I stand by the conclusion in my original post, but would like to further clarify my conclusion from “maybe” to “maybe but unlikely.”  I have yet to see a securities lending arrangement structured in a way that would support treating the fees as an expense offset.  While I believe it is conceptually possible, the most likely result will be that securities lending fees will be treated as an item of income.

A Section 754 election can be a favorable tax efficiency tool that is unique to partnerships (as compared to corporations).  However, the complexity, administrative burden and changing economic environment should always be considered carefully.  Every general partner of a partnership should be aware of these rules and their implications.

This post is the second in a three-part series that examines implications of the 2017 Tax Cuts and Jobs Act for the investment management industry.  Part One introduced the Section 199A deduction and its impact on the investment management industry. Part Three will examine the deduction and C Corporation to S Corporation transitions.  Feel free to be in touch with Matt Romano, tax partner, with questions about how these complex new tax developments affect you and your business.

On April 17, 2019, Treasury and the IRS issued a second round of proposed regulations, which significantly addressed many of the questions that existed with respect to the operation of a Qualified Opportunity Fund (“QOF”).  Below is a discussion about the main provisions of the new proposed regulations that would impact managers and advisors of a QOF.  Additional references are made to the statute (IRC section 1400Z-2) as well as the first round of regulations (issued on October 19, 2018).