No profit? No problem!
IPOs: Money-Losing Firms Welcome
Some 83% of U.S. listed initial public offerings in the first three quarters of 2018 were companies that lost money in the 12 months leading up to their debut, according to data compiled by University of Florida finance professor Jay Ritter, and reported by the Wall Street Journal.
This is a new record, topping the dot-com bubble year 2000 when 81% of IPO companies were unprofitable, according to Ritter’s data.
Investors’ tolerance for red ink has been rewarded so far in 2018. Stocks of money-losing companies listing in the U.S. soared about 36% on average from their IPO price so far this year. “That is better than the 32% return for IPO stocks with earnings and the 9% gain for the S&P 500 index,” reports the Journal.
$50 billion in IPOs have been raised by 180 U.S. companies in the first three quarters of 2018, according to Dealogic, which, at that pace “will be the busiest year for new issuance by both measures since 2014.”
Though some analysts may be experiencing déjà vu, “by one measure, the current class of technology IPOs is in a bit better shape than that of the dot-com era. In 2000, just 14% of tech companies listing shares in the U.S. were profitable, compared with 19% so far this year,” according to Ritter’s data.
We are not sure that 5% difference will alleviate concerns of the wary. “For now, investor fear of missing out on a rally is trumping such concerns, as major stock indexes trade near records,” says the Journal.
Let’s do Lunch
IRS Says Meals Still Deductible…for now
It’s often been said: “There’s no such thing as a free lunch.” True, but at least for now, it’s still tax deductible.
The IRS has issued guidance clarifying that taxpayers may generally continue to deduct 50% of the food and beverage expenses associated with operating their trade or business.
The confusion stems from the recent enactment of the Tax Cuts and Jobs Act (TCJA) that eliminated expense deductions for entertainment, amusement, or recreation, but did not specifically address business meals.
The IRS has issued transitional guidance (Notice 2018-76) and said taxpayers can rely on that guidance until it issues proposed regulations. The agency is requesting comments by December 2, 2018.
Under the interim guidance, taxpayers may deduct 50% of an allowable business meal expense if:
- The expense is an ordinary and necessary business expense under Sec. 162(a) paid or incurred during the tax year when carrying on any trade or business;
- The expense is not lavish or extravagant under the circumstances;
- The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished;
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- For food and beverages provided during or at an entertainment activity, they are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.
New IRS Commissioner
Charles Rettig is now the 49th commissioner of the IRS, having been sworn in by Treasury Secretary Steven Mnuchin. He succeeds John Koskinen whose term expired in November 2017. The IRS was led in the interim by acting commissioner David Kautter.
Nominated by President Trump, Rettig is an attorney who has served as vice chair, administration, for the American Bar Association’s Section of Taxation, vice president of the American College of Tax Counsel, and chair of the IRS Advisory Council. He has practiced law with the Beverly Hills-based tax law firm of Hochman, Salkin, Rettig, Toscher & Perez PC.
In his confirmation hearing before the Senate Finance Committee in June, Rettig acknowledged and promised to address some of the challenges facing the IRS: “Long waits on the phone and inadequate IT systems are significant sources of frustration. If confirmed, I will work with this Committee to take on these and other challenges with the impact on taxpayers in mind,” he told the committee.
Uptick in Number of Financial Restatements
After a steady six year decline in the number of financial restatements by U.S. public companies, 2018 may end with an increase over last year.
During the first six months of 2018, 65 companies detected mistakes (compared to 60 for the same period last year) that required them to restate and refile their financial statements, according to research firm Audit Analytics.
The uptick came during a period when finance teams were overhauling corporate accounting paperwork to comply with the new U.S. tax law and new revenue accounting rules, reports the Wall Street Journal.
Financial Pleasure Index
Financial Satisfaction at Record High
The American Institute of Certified Public Accounts (AICPA) is out with its latest survey measuring American’s financial outlook. Simply Stated: “Financial pleasure outweighs financial pain,” at least during the second quarter of 2018.
Americans continue to experience their highest levels of personal financial satisfaction despite a rising interest rate environment, according to the AICPA’s Q2 2018 Personal Financial Satisfaction Index (PFSi).
“Three measures of Americans’ financial discomfort continued to improve compared with the prior year and quarter: loan delinquencies, underemployment, and personal taxes,” according to the index. A “substantial” rise in inflation from last quarter — reaching 2.3%, up from 1.7% in the previous quarter was called out as the leading contributor to financial pain.
In Auditors We Trust
Investors Trust Auditors Most
Public company auditors remain the group investors trust most to protect their interests, according to the latest Main Street Investor survey conducted by Morning Consult for the Center for Audit Quality (CAQ).
The survey, which annually measures retail investor confidence in U.S. capital markets, global capital markets, public companies, and audited financial information, found the following regarding U.S. investor confidence:
- 74% expressed confidence in U.S. capital markets.
- 78% showed confidence in investing in U.S. publicly traded companies.
- 56% expressed confidence in capital markets outside the U.S.
- 81% named independent auditors as the most effective entity in their investor protection roles.
Respondents also expressed high confidence in audit committees (80%), financial analysts (79%), stock exchanges (77%), as well as financial advisors and brokers (75%).
The survey performed by the CAQ, which is affiliated with the AICPA, went to 1,100 adults who are primary or shared decision-makers in their households’ finances and who possess at least $10,000 in investments.
The reasons given by respondents who said they are confident in U.S. capital markets include: the economy is growing and will continue to get better (19%), the U.S. stock market is performing well (16%). Confidence in the Trump administration, and confidence in the economic and political system of capitalism each received 13%. Only 2% cited the U.S. Congress.
Simple Stated Thoughts
There’s a New SEC in Town
By Corey Fischer, CPA
Firm Managing Partner
“There’s a new Sheriff in Town.”
Those are words that have sent chills up the spines of micro- and small-cap companies for almost a decade. But the winds have shifted. Companies can take a breath of fresh air. Major regulatory change is happening… and it’s OK.
Nowhere is that more evident than at the Securities and Exchange Commission, where its recently seated chairman, Jay Clayton, has set into motion a new way of doing business. More conscious of the intended as well as the unintended consequences of its actions, the new SEC is fully committed to protecting the public, but intends to do so without choking the life out of the capital markets. Both are possible.
That was fully on display when the SEC Commission adopted amendments earlier this year that changed the definition of a “Smaller Reporting Company (SRC);” a filing status that requires less reporting compliance. Simply said, a lot of bigger companies will now be smaller companies in the eyes of the SEC. And, that’s a very good thing.
Under the SEC’s new definition, a company now can qualify for SRC filing status if it has public float of less than $250 million (formerly $75 million) or alternatively, if it has less than $100 million (formerly $50 million) in annual revenues and a public float of less than $700 million (formerly no public float).
Companies that qualify as a SRC do not need to comply with the stiffer disclosure rules required by their larger company brethren. The scaled disclosure requirements for smaller reporting companies permit less extensive narrative disclosures, particularly in the description of executive compensation. It also permits them to provide audited financial statements for two fiscal years, instead of three.
Although qualifying as a SRC does not automatically make a registrant a non-accelerated filer, Mr. Clayton has directed his staff to formulate recommendations to the Commission for possible additional changes to the “accelerated filer” definition that, if adopted, would reduce the number of accelerated filers and provide a healthy reduction in compliance costs.
Until that happens, it should be noted that changing filer status to smaller reporting company does not necessarily exempt companies from section 404(b) of the Sarbanes-Oxley Act, which requires an auditor’s attestation of the adequacy of a company’s internal financial statement and disclosure controls — something deregulation advocates wanted changed, but did not happen.
Upon adoption of the new rules, Chairman Clayton said, “Expanding the smaller reporting company definition recognizes that a one-size regulatory structure for public companies does not fit all. These amendments to the existing SRC compliance structure bring that structure more in line with the size and scope of smaller companies while maintaining our long-standing approach to investor protection in our public capital markets.”
It is encouraging to hear the head of a regulatory agency speak about fostering economic growth and more efficient markets while concurrently committing to protecting the public. It is a very different posture for an agency that for too long measured its success by the number of its enforcements and the fines it collected.
Unlike many of his recent predecessors, Chairman Clayton comes to the position from the business community, not as a former prosecutor. It should not be surprising that he would seek solutions in the marketplace rather than the courthouse.