The IRS intends to issue proposed regulations governing the capitalization and amortization of specified research and experimental (SRE) expenditures under amendments to Sec. 174 made by the law known as the Tax Cuts and Job Act (TCJA), P.L. 115-97, the treatment of SRE expenditures under Sec. 460, and the application of Sec. 482 to cost-sharing arrangements involving SRE expenditures, the Service said in Notice 2023-63, which was issued Friday. 

In the meantime, taxpayers and tax professionals can rely on interim guidance provided in the notice on which the proposed regulations will be based. 

Before the TCJA amendments, taxpayers could expense research and experimentation costs currently, or capitalize the costs, or capitalize and amortize them over a period of not more than 60 months. Under Sec. 174 as amended, taxpayers must amortize them over five years for domestic expenditures, or 15 years for SRE expenditures attributed to foreign research, using a half-year convention.  

The guidance covers seven areas: 

• Capitalization and amortization of SRE expenditures: The notice provides taxpayers with clarity regarding the requirement in Sec. 174(a) to capitalize and amortize SRE expenditures and the treatment of short tax years. For example, the term “midpoint” means the first day of the seventh month of the tax year in which the SRE expenditures are paid or incurred, except for short tax years. 
• Scope of Sec. 174: The notice provides clarity in determining whether expenditures are SRE expenditures subject to capitalization and amortization under Sec. 174. For example, costs of labor, patents, and materials and supplies are covered, while costs to register an internet domain, website hosting, or interest on debt to finance SRE activities are not. 
• Software development: The notice provides taxpayers with clarity in determining whether certain activities constitute software development for purposes of Sec. 174(c)(3), which includes planning the development of the software, designing the software, and writing source code. 
• Research provided under contract: The notice provides taxpayers with clarity in determining whether costs paid or incurred for research performed under contract are SRE expenditures under Sec. 174. 

• Disposition, retirement, or abandonment of property: The notice clarifies how to treat unamortized SRE expenditures if the property is disposed of, retired, or abandoned in certain transactions. 
• Long-term contracts under Sec. 460: The notice provides information about a proposed revision to Sec. 460 in upcoming proposed regulations about how to apply the percentage-of-completion method to account for income from long-term contracts when allocable contract costs include SRE expenditures. 
• Cost-sharing regulations at Regs. Sec. 1.482-7: The notice gives information about a proposed revision to Regs. Sec. 1.482-7(j)(3)(i), which addresses cost-sharing transaction payments between participants in certain cost-sharing arrangements. 

With one exception, a taxpayer may choose to rely on the rules described in the notice, including for expenditures paid or incurred in tax years beginning after Dec. 31, 2021, provided the taxpayer relies on the rules and applies them in a consistent manner. The guidance cannot be relied on for rules regarding SRE expenditures for property that is contributed to, distributed from, or transferred from a partnership, the IRS said. 

The TCJA, enacted in 2017, become effective for tax years beginning after Dec. 31, 2021, so tax professionals have pushed the IRS for guidance. The AICPA previously submitted comments on May 10 requesting guidance on the Sec. 174 method. And it continues to advocate to Congress on extending the Sec. 174 expensing treatment, including comments submitted to Congress on May 9, 2023, and Feb. 14, 2023. 

The guidance does not apply when determining whether an expenditure paid or incurred for tax years beginning before Jan. 1, 2022, is a research or experimental expenditure under Sec. 174 as in effect for tax years beginning before Jan. 1, 2022. 

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ESG: Beyond Profit Margins

Historically, financial reporting has predominantly focused on quantitative measures such as revenues, expenses, and profit margins. However, the scope of financial analysis has now expanded to encompass qualitative aspects that reflect a company’s impact on the environment, society, and corporate governance. ESG factors delve into realms that go beyond traditional bottom lines, revealing a company’s commitment to sustainable practices, social responsibility, and ethical governance.

Investor Preferences Shaping Reporting Landscape

Investors are increasingly recognizing the correlation between a company’s ESG performance and its potential for long-term value creation. As a result, they are factoring in ESG metrics when making investment decisions. This shift in investor sentiment is driving companies to integrate ESG considerations into their financial reporting to attract investment and enhance shareholder confidence.

In the public market, ESG-related disclosure is no longer optional; it’s becoming a regulatory requirement. The Securities and Exchange Commission (SEC) and other global regulators are pushing for standardized ESG reporting to ensure consistency and comparability. For private companies, adopting ESG reporting practices can offer a competitive edge when seeking funding from ethical investors or venture capitalists who prioritize sustainability.

The Triple Bottom Line in Action

ESG reporting provides a holistic view of a company’s performance across three dimensions:

1. Environmental: Companies are being held accountable for their carbon footprint, resource consumption, and environmental stewardship. Demonstrating a commitment to reducing emissions, conserving resources, and implementing eco-friendly practices not only aligns with global sustainability goals but can also reduce operational costs over time.
2. Social: Addressing social aspects means evaluating a company’s impact on employees, customers, and the communities in which it operates. Ethical labor practices, diversity and inclusion initiatives, and community engagement efforts contribute to a positive corporate image and foster stronger stakeholder relationships.
3. Governance: Strong corporate governance ensures transparent decision-making and responsible management. Robust board structures, ethical leadership, and effective risk management are key components that instill investor trust and reduce potential legal and reputational risks.

ESG Reporting as a Driver of Innovation

ESG reporting necessitates comprehensive data collection and analysis, spurring companies to adopt advanced technologies and data-driven strategies. This drive for innovation not only enhances ESG performance but also positions companies at the forefront of industry trends. By embracing sustainable practices and incorporating them into their business strategies, companies can foster a culture of continuous improvement and adaptability.

Navigating Challenges and Seizing Opportunities

While the integration of ESG into financial reporting offers numerous benefits, there are also a range of challenges to contend with. Gathering accurate and relevant data, selecting appropriate metrics, and ensuring the credibility of reported information can pose hurdles. However, these challenges present opportunities for companies to streamline their operations, enhance data governance, and cultivate a culture of accountability.

In conclusion, the transformation of financial reporting through ESG considerations is well underway, reshaping how businesses quantify and communicate their value. As sustainability becomes a key driver of competitiveness, companies that proactively embrace ESG principles will not only meet stakeholder expectations but also position themselves for long-term success in an evolving business landscape. By prioritizing the triple bottom line of ESG, companies can navigate uncertainty, drive innovation, and contribute to a more sustainable future for all.

For those seeking further insights into the realm of ESG, I welcome you to connect with me directly via email at jordand@horizonadvisors.com.

#ESG #Sustainability #FinancialReporting #CorporateResponsibility #Innovation

The post The Emerging Dominance of ESG: A Paradigm Shift in Financial Reporting appeared first on Horizon Advisors.

The new rules will require registrants to disclose on the new Item 1.05 of Form 8-K any cybersecurity incident they determine to be material and to describe the material aspects of the incident’s nature, scope, and timing, as well as its material impact or reasonably likely material impact on the registrant. An Item 1.05 Form 8-K will generally be due four business days after a registrant determines that a cybersecurity incident is material. The disclosure may be delayed if the United States Attorney General determines that immediate disclosure would pose a substantial risk to national security or public safety and notifies the Commission of such determination in writing.

The new rules also add Regulation S-K Item 106, which will require registrants to describe their processes, if any, for assessing, identifying, and managing material risks from cybersecurity threats, as well as the material effects or reasonably likely material effects of risks from cybersecurity threats and previous cybersecurity incidents. Item 106 will also require registrants to describe the board of directors’ oversight of risks from cybersecurity threats and management’s role and expertise in assessing and managing material risks from cybersecurity threats. These disclosures will be required in a registrant’s annual report on Form 10-K.

The rules require comparable disclosures by foreign private issuers on Form 6-K for material cybersecurity incidents and on Form 20-F for cybersecurity risk management, strategy, and governance.

The final rules will become effective 30 days following publication of the adopting release in the Federal Register. The Form 10-K and Form 20-F disclosures will be due beginning with annual reports for fiscal years ending on or after December 15, 2023. The Form 8-K and Form 6-K disclosures will be due beginning the later of 90 days after the date of publication in the Federal Register or December 18, 2023. Smaller reporting companies will have an additional 180 days before they must begin providing the Form 8-K disclosure. With respect to compliance with the structured data requirements, all registrants must tag disclosures required under the final rules in Inline XBRL beginning one year after initial compliance with the related disclosure requirement.

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The updates come as a new era of lease accounting standards is getting real for private companies. Better known as ASC (or Topic) 842, companies must record operating leases longer than one year on their balance sheet, both as an asset and a liability, in the same way as capital leases have always been recorded.  Public companies have been subject to the new standards for some time, but the requests for the updates have emerged as private companies are now also subject to them as of fiscal years beginning Dec. 15, 2021.

The first update is expected to reduce legal and other costs as private companies deal with the accounting treatment for leases. Under the change, a private company doesn’t have to determine whether the terms and conditions of a lease are enforceable if the control arrangement is in writing and meets the conditions for a lease.

The second update to the standard will change how private and public companies should treat improvements made to a property under so-called common-control leases.

Under existing standards, leasehold improvements must be amortized over the shorter of the useful life of the improvements or the lease term. Under the proposed update, companies would amortize the improvements over the useful life of the improvements to the common control lease group so long as that company uses the property over the life of the lease.

The updates are currently on track to be effective for fiscal years beginning after Dec. 15, 2023. 

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