Updated ethics guidance to definition and related interpretations: Loans, acquisitions, and other transactions

Standards-setting

Professional Ethics Division

Revised definition and interpretations

Loans, Acquisitions, and Other

Transactions

ET sec. 0.400.06. 1.210.010, 1.224.010, 1.260.010, 1.260.020, and

1.270,010

Effective December 31, 2022

March 2022

Ethics interpretations and other guidance are promulgated by the executive committee of

the Professional Ethics Division to provide guidelines about the scope and application of

the rules but are not intended to limit such scope or application. Publication in the

Journal of Accountancy constitutes notice to members.

The Professional Ethics Executive Committee adopted the following revisions at its

February 2022 meeting:

• Definition of “beneficially

owned,” (ET sec. 0.400.06)

• “Conceptual Framework for Independence” (ET sec. 1.210.010)

• “Client Affiliates” (ET sec. 1.224.010)

• “Loans” (ET sec. 1.260.010)

• “Loans and Leases With Lending Institutions” (ET sec. 1.260.020)

• “Immediate Family Members” (ET sec. 1.270.010)

otice of the revisions will appear in the Journal of Accountancy online in June 2022.

The new interpretations and revisions are effective December 31. 2022, and early

implementation is allowed.

Contents

0.400 Definitions ........................................................................................................................ 1

1.210.010 Conceptual Framework for Independence [excerpt] .................................................. 2

1.224.010 Client Affiliates .......................................................................................................... 3

1.260.010 Loans .......................................................................................................................10

1.260.020 Loans and Leases With Lending Institutions .............................................................11

1.270.010 Immediate Family Members [excerpt] .......................................................................14

1 Professional Ethics Division: Loans, Acquisitions, and Other Transactions

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0.400 Definitions

.06 Beneficially owned, beneficial ownership interest. Describes a financial interest of which

providing an individual or entity, is not the record owner, but has a the right to some or all

of the underlying benefits of ownership. These benefits include the authority to direct the

voting or disposition of the interest or to receive the economic benefits of the ownership of

the interest.

[See Revision History Table]

2 Professional Ethics Division: Loans, Acquisitions, and Other Transactions

Additions appear in

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1.210.010 Conceptual Framework for Independence [excerpt]

.16 Self-interest threat. The threat that a member could benefit, financially or otherwise, from an

interest in, or relationship with, an attest client or persons associated with the attest client.

Examples of self-interest threats include the following:

a. A member has a direct financial interest or material indirect financial interest in

the attest client. [1.240.010]

b. A member has a loan from the attest client, an officer or a director of the attest

client with the ability to affect decision-making, or any individual with a

beneficial ownership interest

(known through reasonable inquiry) that

gives the individual significant influence over, who owns 10 percent or more

of the attest client’s outstanding equity securities. [1.260.010]

c. A member or member’s firm relies excessively on revenue from a single attest

client.

d. A member or member’s firm has a material joint venture or other material joint

business arrangement with the attest client. [1.265

]

[See Revision History Table.]

Additions appear in

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1.224.010 Client Affiliates

.01 Financial interests in, and other relationships with, affiliates of a financial statement attest

client may create threats to a member’s compliance with the “Independence Rule”

[1.200.001].

.02 When a client is a financial statement attest client, members should apply the

“Independence Rule” [1.200.001] and related interpretations applicable to the financial

statement attest client to their affiliates, except in the following situations:

a. During the period of the professional engagement, aA covered member may

have a loan to or from an

i. officer or director of an affiliate of a financial statement attest client,

unless the officer or director has the ability to affect the decision-

making at the financial statement attest client.

ii. individual with a beneficial ownership interest (known through

reasonable inquiry) in an affiliate of a financial statement attest client,

unless the ownership interest gives the individual significant influence

over the financial statement attest client.

individual who is an officer, a director, or a 10 percent or more owner of an affiliate of

a financial statement attest client during the period of the professional engagement

unless the covered member knows or has reason to believe that the individual is in

such a position with the affiliate. If the covered member knows or has reason to

believe that the individual is an officer, a director, or a 10 percent or more owner of

the affiliate, the covered member should evaluate the effect that the relationship

would have on the covered member’s independence by applying the “Conceptual

Framework for Independence” [1.210.010].

b. A member or the member’s firm may provide prohibited nonattest services to entities

described under items c–l of the definition of affiliate during the period of the

professional engagement or during the period covered by the

financial statements,

provided that it is reasonable to conclude that the services do not create a self-

review

threat with respect to the financial statement attest client because the results

of the nonattest services will not be subject to financial statement attest procedures.

For any other threats that are created by the provision of the nonattest services that

are not at an

acceptable level (in particular, those relating to management

participation), the member should apply safeguards to eliminate or reduce the threats

to an acceptable level.

c. A firm will only have to apply the “

Subsequent Employment or Association With an

Attest Client” interpretation [1.279.020] of the “Independence Rule” if the former

employee, by virtue of his or her employment at an entity described under items c–l

of the definition of affiliate, is in a

key position with respect to the financial statement

attest client. Individuals in a position to influence the attest engagement and on the

attest engagement team who are considering employment with an affiliate of a

financial statement attest client will still need to report consideration of employment

to an appropriate person in the firm and remove themselves from the financial

statement

attest engagement, even if the position with the affiliate is not a key

position.

d. A covered member’s immediate family members and close relatives may be

employed in a key position at an entity described under items c–l of the definition of

affiliate during the period of the professional engagement or during the period

covered by the financial statements, provided they are not in a key position with

respect to the financial statement attest client.

e. A covered member who is an individual on the attest engagement team, an individual

in a position to influence the attest engagement, or the firm may have a lease that

does not meet the requirements of the “

Leases” interpretation [1.260.040] under the

“Independence Rule” with an entity described under items c–l of the definition of

affiliate during the period of the professional engagement. The covered member

should use the “Conceptual Framework for Independence” to evaluate whether any

threats created by the lease are at an acceptable level. If the covered member

concludes that threats are not at an acceptable level, the covered member should

apply

safeguards to eliminate the threats or reduce them to an acceptable level.

f. A member or member’s firm may enter into a staff augmentation arrangement with

entities described under items (c)–(l) of the definition of affiliate during the period of

the professional engagement or during the period covered by the financial

statements. The member should use the “Conceptual Framework for Independence

”

to evaluate whether any threats created by the staff augmentation arrangement are

at an acceptable level. If the member concludes that threats are not at an acceptable

level, the member should apply safeguards to eliminate the threats or reduce them to

an acceptable level. If safeguards are not available or cannot be applied to eliminate

or reduce the threats to an acceptable level, the member should not enter into the

staff augmentation arrangement

.03 A member must expend best efforts to obtain the information necessary to identify the

affiliates of a financial statement attest client. If, after expending best efforts, a member is

unable to obtain the information to determine which entities are affiliates of a financial

statement attest client,

threats would be at an acceptable level and independence would

not be impaired if the member (a) discusses the matter, including the potential impact on

independence, with those charged with governance; (b) documents the results of that

discussion and the efforts taken to obtain the information; and (c) obtains written

assurance from the financial statement attest client that it is unable to provide the member

with the information necessary to identify the affiliates of the financial statement attest

client.

.04 This interpretation does not apply to a financial statement attest client

that is covered by

the “State and Local Government Client Affiliates” interpretation [1.224.020] of the

“Independence Rule” [1.200.001]. [Prior reference: paragraph .20 of ET section 101]

Acquisitions or and Other Business Combinations That Involve Transaction Involving

a Financial Statement Attest Client or Its Affiliates That Results in the Creation of a

New Affiliate

.05 An entity may become a new affiliate of an existing financial statement attest client

because of an acquisition or other transaction. A threat to independence and,

therefore, to the ability of a member or member’s firm to continue a financial

statement attest engagement might be created by previous or current interests or

relationships between the member or member’s firm and the new affiliate.

Paragraphs .06–.13 provide guidance on how independence is affected when such

interests in or relationships with a new affiliate exist. The exception in paragraph .06

would apply when (1) a financial statement attest client is acquired during the period of the

professional engagement by either a nonclient or a nonattest client (acquirer), (2) the

attest engagement covers only periods prior to the acquisition, and (3) the member or

member’s firm will not continue to provide financial statement attest services to the

acquirer.

An Existing Financial Statement Attest Client Is Acquired and the Member or Member’s

Firm Will Not Continue Providing Financial Statement Attest Services to Such Client

After the Current Attest Report Is Issued and the Report Does Not Cover Periods After

the Effective Date of the Acquisition

.06 Independence will not be considered impaired with respect to the financial statement attest

client because When a member or member’s firm has an interest in or relationship with

the an acquirer that may otherwise impair independence as a result of the requirements of

this interpretation or the definition of “attest client” (as it relates to the entity or person that

engages the member or member’s firm to perform the attest engagement).,

independence with respect to the financial statement attest client will not be

considered impaired if all the following conditions are met:

a. The acquisition occurs during the period of the professional engagement.

b. The financial statement attest engagement covers only periods prior to the

effective date of the acquisition.

c. The member or member’s firm will not continue to provide financial statement

attest services to the existing financial statement attest client for periods after

the effective date of the acquisition.

07Notwithstanding paragraph .06, a member should give consideration to the requirements of

the “Conflicts of Interest” interpretation [1.110.010], under the “Integrity and Objectivity Rule”

[1.100.001], with regard to any relationships that the member knows or has reason to believe

exist with the acquirer, the financial statement attest client, or the firm.

.08A member should refer to paragraph .03 of “Application of the AICPA Code” [0.200.020] for

guidance on circumstances involving foreign network firms.

An Existing Financial Statement Attest Client or Its Affiliate Is Involved in an Acquisition

or Other Transaction and the Member or Member’s Firm Expects to Continue Providing

Financial Statement Attest Services to Such Client

.07 When an acquisition or other transaction creates a new affiliate of a financial

statement attest client during the period of professional engagement and the

member or member’s firm expects to continue providing financial statement attest

services to the financial statement attest client after the effective date of the

acquisition or other transaction, the following conditions should be met:

a. The member or member’s firm should identify and evaluate previous and

current interests in and relationships with the new affiliate, including actions

taken to address the threat to independence

, that might affect independence

and therefore the member’s or member’s firm’s ability to continue the financial

statement

attest engagement after the effective date of the acquisition or other

transaction.

b. Except as provided for in paragraph .08, the member or member’s firm should

take steps to end any interests in or relationships with the new affiliate that

would impair

independence by the effective date of the acquisition or other

transaction.

.08 As an exception to paragraph .07b, if the interest in or relationship with the new

affiliate

cannot reasonably be ended by the effective date of the acquisition or other

transaction (for example, the new affiliate is not able to transition a nonattest

service in an orderly manner to another service provider by that date), the

member

or member’s firm should do the following:

a. Evaluate the threat to independence that is created by the interest or

relationship. Factors that are relevant in evaluating the significance of a threat

when there are interests and relationships with a new affiliate that cannot

reasonably be ended could include these:

i. The nature and significance of the interest or relationship

ii. The nature and significance of the affiliate relationship (for example,

whether the affiliate is a subsidiary, parent, or sister entity)

iii. The length of time until the interest or relationship can reasonably be

ended

b. Discuss with those charged with governance

the evaluation of the significance

of threat and the reasons that the interest or relationship cannot reasonably be

ended by the effective date of the acquisition or other transaction.

.09 Following the discussion in paragraph .08b, if those charged with governance

request the member or member’s firm to continue to provide financial statement

attest services to the financial statement attest client, the member or member’s firm

should do so only under the following circumstances:

a. The interest in or relationship with the new affiliate that would impair

independence will end as soon as reasonably possible but no later than six

months after the effective date of the acquisition or other transaction.

b. Any individual who has such an interest in or relationship with the new

affiliate, including one that has arisen through performing a nonattest service

that would impair independence under the “Nonattest Services

” subtopic

[1.295] of the “Independence Rule” [1.200.001], will not be a member of the

attest engagement team or an individual responsible for the engagement

quality control review.

c. Safeguards will be applied, as necessary, and discussed with those charged

with governance.

An Existing Financial Statement Attest Client or Its Affiliate Is Involved in an Acquisition

or Other Transaction and the Member or Member’s Firm Will Complete the Existing

Financial Statement Attest Engagement but Will Not Continue Providing Such Services

After the Current Attest Report Is Issued but the Report May Cover Periods After the

Effective Date of the Acquisition or Other Transaction

.10 When a member or member’s firm will not continue to provide financial statement

attest services to the financial statement attest client that is involved in an

acquisition or other transaction, the member or member’s firm may issue the

current report covering a period after the effective date of the acquisition or other

transaction if all the following conditions are met:

a. The member or member’s firm completed a significant amount of work on the

current financial statement attest engagement

prior to the effective date of the

acquisition or other transaction. Whether a significant amount of work has

been completed will depend upon the remaining procedures as compared to

the overall engagement procedures.

b. The member or member’s firm expects to complete the remaining financial

statement attest procedures and issue the attest report within a reasonable

period of time. A reasonable period of time will be dependent upon facts and

circumstances.

c. Those charged with governance

request that the member or member’s firm

complete the financial statement attest engagement despite the member or

member’s firm continuing to have an interest in or relationship with the new

affiliate that will impair independence.

d. The member or member’s firm has evaluated the significance of the threat to

independence and discussed the results with those charged with governance.

e. The member or member’s firm complies with the requirements of paragraph

.09b–c.

f. The member or member’s firm ceases to be the auditor no later than the date

that the attest report is issued.

Other Considerations When an Existing Financial Statement Attest Client or Its Affiliate

Is Involved in an Acquisition or Other Transaction

Objectivity

.11 Even if all the requirements of paragraphs .06–.10 could be met, the member or

member’s firm should consider whether the requirements of the “Conflicts of

Interest for Members in Public Practice” interpretation [1.110.010] under the

“Integrity and Objectivity Rule” [1.100.001] are applicable, with regard to any

circumstances identified in paragraphs .06, .07, or .10.

Documentation

.12 The member or member’s firm should consider documenting the following:

a. Any interests or relationships identified in paragraphs .07 or .10 that will not be

ended by the effective date of the acquisition or other transaction and the

reasons they will not be ended

b. The safeguards

applied, if appropriate

c. The results of the discussion with those charged with governance

d. The reasons the previous and current interests and relationships do not create

a threat

that will compromise objectivity

Circumstances Involving Foreign Network Firms

.13 A member should refer to paragraph .03 of “Application of the AICPA Code” [0.200.020]

for guidance on circumstances involving foreign network firms.

Effective date

.14 Paragraphs .01–.04 are effective for engagements covering periods beginning on or after

January 1, 2014. Early implementation is allowed.

[See Revision History Table]

Nonauthoritative questions and answers regarding the application of the independence rules

to affiliates of employee benefit plans are available at https://us.aicpa.org/interestareas/

professionalethics/resources/tools/downloadabledocuments/faqs-application-independence-

rules-affiliates-of-employee-benefit-plans.pdf.

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. Deletions appear in strikethrough.

1.260.010 Loans

.01 If a covered member has a loan to or from an attest client, any officer or director of the attest

client with the ability to affect decision-making, or any individual with a beneficial

ownership interest (known through reasonable inquiry) that gives the individual

significant influence over owning 10 percent or more of the attest client’s outstanding

equity securities or other ownership interests, a self-interest threat to the covered member’s

compliance with the “Independence Rule” [1.200.001] may exist. Threats would not be at an

acceptable level and independence would be impaired if the loan exists during the period of

the professional engagement, except as provided for in the

a. “Loans and Leases With Lending Institutions” interpretation [1.260.020] of the

“Independence Rule.”

b. “Client Affiliates” interpretation [1.224.010] of the “Independence Rule.”

[See Revision History Table]

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1.260.020 Loans and Leases With Lending Institutions

.01 The “Loans” interpretation [1.260.010] of the “Independence Rule” [1.200.001] provides that

a self-interest threat would not be at an acceptable level and independence would be

impaired if a covered member had a loan to or from an attest client, any officer or director of

the attest client with the ability to affect decision-making, or any individual with a

beneficial ownership interest (known through reasonable inquiry) that gives the

individual significant influence over owning 10 percent or more of the attest client’s

outstanding equity securities or other ownership interests, except as provided for in this

interpretation.

Home Mortgages, Other Secured Loans, and Immaterial Unsecured Loans, and Student

Loans

.02 The loans covered by paragraph .03 include home mortgages, other secured loans,

unsecured loans that are not material to the covered member’s net worth (that is,

immaterial unsecured loans), and student loans.

.03 Home mortgages, secured loans, and immaterial unsecured loans However, tThreats would

be at an acceptable level and independence would not be impaired if a covered member or

his or her immediate family has any of the loans identified in paragraph .02 an unsecured

loan that is not material to the covered member’s net worth (that is, immaterial unsecured

loan), a home mortgage, or a secured loan from a lending institution attest client, if all the

following safeguards are met:

a. The home mortgage, secured loan, or immaterial unsecured loan was loans were

obtained under the lending institution’s normal lending procedures, terms, and

requirements. In determining when the home mortgage, secured loan, or immaterial

unsecured loan was obtained, the date a commitment or line of credit is granted

must be used, rather than the date a transaction closes or funds are obtained.

b. The home mortgage, secured loan, or immaterial unsecured loans were was

obtained in one of the following ways (in determining when the loans were

obtained, the date a commitment or line of credit is granted must be used,

rather than the date a transaction closes or funds are obtained):

i. Ffrom the lending institution prior to its becoming an attest client;

ii. Ffrom a lending institution for which independence was not required and that

was later sold to an attest client;

iii. after May 31, 2002, Ffrom a lending institution attest client by a borrower prior

.02

.03

to the member

his or her becoming a covered member with respect to that

attest client; or

iv. Pprior to May 31, 2002, and the requirements of the loan transition provision

in www.aicpa.org/interestareas/professionalethics/community/

downloadabledocuments/transistion%20periods.pdf are met.

c. After an individual becomesing a covered member, any home mortgage, secured

loan, or immaterial unsecured loans must be kept current regarding all terms, at all

times, and the terms may not change in any manner not provided for in the original

agreement. Examples of changed terms are a new or extended maturity date, a new

interest rate or formula, revised collateral, and revised or waived covenants.

d. The estimated fair value of the collateral for a home mortgages or other secured

loans must should equal or exceed the outstanding balance during the term of the

home mortgages or other secured loans. If the estimated fair value of the collateral is

less than the outstanding balance of the home mortgages or other secured loans,

the portion that exceeds the estimated fair value of the collateral may not be material

to the covered member’s net worth.

Loans to Partnerships and Other Similar Entities

.04 Loans to partnerships and other similar entities. For purposes of applying the loan provision

in paragraph .032 when the covered member is a partner in a partnership, a loan to a limited

partnership (or similar type of entity) or general partnership would be ascribed to each

covered member who is a partner in the partnership on the basis of his or her legal liability

as a limited or general partner if

a. the covered member’s interest in the limited partnership, either individually or

combined with the interest of one or more covered members, exceeds 50 percent of

the total limited partnership interest, or

b. the covered member, either individually or together with one or more covered

members, can control

the general partnership.

Even if no amount of a partnership loan is ascribed to the covered member(s) previously

identified, threats to compliance with the “Independence Rule

” [1.200.001] would not be at

an acceptable level and could not be reduced to an acceptable level through the application

of safeguards if the partnership renegotiates a loan or obtains a new loan that is not a

permitted loan, as described in paragraph .054 of this interpretation. Accordingly,

independence would be impaired.

Other Loans and Leases

.05 Other loans and leases.Threats would be at an acceptable level and independence would

not be impaired if a covered member obtains one of the following types of loans or leases

under the lending institution’s normal lending procedures, terms, and requirements, provided

.03

.05

.04

the covered member complies with the terms of the loan or lease agreement at all times (for

example, keeping payments current):

a. Automobile loans and leases collateralized by the automobile

b. Loans fully collateralized by the cash surrender value of an insurance policy

c. Loans fully collateralized by cash deposits at the same lending institution (for

example, passbook loans)

.06 Threats would be at an acceptable level and independence would not be impaired

if a

covered member Aggregate outstanding balances from has consumer loans (for

example, credit cards, retail installment loans, and home improvement loans) and

overdraft reserve accounts from the same

lending institution that have an aggregate

outstanding balance of $10,000 or less on a current basis, taking into consideration the

after payment of the most recent monthly statement made by the due date or within and any

available grace period.

Other Matters

.07 Members should consider that certain state and federal agencies may proscribe more

restrictive requirements over lending institutions that are subject to their oversight and that,

in turn, impose more restrictive requirements upon members that perform attest

engagements for these lending institutions. For example, the Securities and Exchange

Commission (SEC) proscribes more restrictive requirements over members providing attest

services to lending institutions and broker-dealers within their purview. [Prior reference:

paragraph .07 of ET section 101 and paragraphs .150–.151 of ET section 191]

.08 Covered members may be subject to additional restrictions, as described in the “Depository

Accounts” interpretation [1.255.010], and the “Member of a Credit Union” interpretation

[1.280.040], and the “Leases” interpretation [1.260.040] of the “Independence Rule”

[1.200.001].

[See Revision History Table]

.07 .05

.08 .06

.06

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. Deletions appear in strikethrough.

1.270.010 Immediate Family Members [excerpt]

.03 When materiality of a financial interest or a loan is identified as a factor affecting

independence in the interpretations of the “Independence Rule” [1.200.001], interests of the

immediate family member and the covered member should be combined to determine

materiality to the covered member.

[See Revision History Table]

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