SEC Developments Conference Day 2Posted: January 11, 2016
In continuing my discussion of the 2015 AICPA SEC & PCAOB Developments Conference last month in Washington DC, day two focused on standard setting. We heard from the FASB, IASB and PCAOB on accounting and auditing standards they are working on. I commented last year how the FASB and IASB Chairman had to be separated by a moderator and that the SEC seemed to be taking aim at the PCAOB in stating a number of criticisms. This year was a comparative love fest between the SEC and PCAOB, and the FASB and IASB. Everybody was making nice and being complimentary. I don’t know what made for the change. Maybe everyone realized being upset wasn’t going to change anything. Whatever the reason, the love fest was clearly noticeable.
From the FASB, we heard about all of the standards they are working on. Two points of particular interest were that they are not planning to create a formal TRG for the leasing standard when it is issued, but they have already formed one for the credit loss standard. Both standards are expected to be issued in early 2016.
We heard from the PCAOB about several projects they are working on including disclosure of the audit partner name through form AP and plans to re-propose changes to the auditor report. The stealth area from a preparer perspective might be in the plans to issue a new auditing standard on the use of the work of specialist. The initial proposal might require auditors to treat all work either received from management or from a specialist the same. This would be a big change from today and get rid of some of the benefit of using a specialist in the first place. Normally preparers don’t care much about the proposed auditing standards, but this is one preparers might want to take a look at when it comes out.
The growing reporting issues around cyber security resulted in the first ever panel on cyber security at the conference. While people aren’t hacking financial systems to change financial statements, the reality is that cyber security is a big operational and reputation risk that is a critical company reporting matter, and therefore needs to be addressed and thought about by external reporting teams.
The SEC Division of Corporate Finance covered many issues, but I thought two were of particular note. A question was asked on the need to restate 2015 (yes 2015) financial statements if a company decided to use the retrospective method of adoption for the new revenue standard. The issue comes up because of the rules around debt and stock offerings. If you make a policy change after your last annual report, which will be the case after first quarter 2018 financial statements are released, then you have to file a restated annual report for the most recent annual report if you wish to make a debt or stock offering. From April 2018 to January 2019, that would mean a company would need to restate their 2017 financial statements, which include 2017, 2016 and 2015. The staff will not issue a mass waiver like they are doing for the five year table. In fact, the staff feels “stuck” on this one. A fix may require rule making by the commission and that is not a slam dunk. If you are a company considering which transition method to use, the ability (or inability) to restate 2015, which could impact your ability to make a debt or stock offering, should be part of your consideration.
Finally, I thought an observation by the staff about the expansion of disclosure was very interesting. The staff pointed out that one of the reasons for the expanding amount of disclosure are the increasing complex transactions being entered into by companies, and the increasing complexity of the companies themselves. That source of disclosure expansion is not going away.