AICPA & CIMA conference on current SEC and PCAOB developments highlights – December 14, 2022

Representatives from Accounting Research Manager are attending the 2022 AICPA & CIMA Conference on Current SEC and PCAOB Developments. This conference is being held Monday through Wednesday, December 12-14, 2022. The following are some highlights from conference speeches or presentations. 

FASB Chair and Accounting Standard Setting update

FASB Chair Rich Jones, FASB Technical Director Hillary Salo, and FASB Deputy Technical Director Nellie Debbeler discussed FASB priorities and current projects. A summary of some of the FASB’s current projects is as follows.

Disclosure of Supplier Finance Program obligations

This project aims to develop disclosure requirements that enhance transparency about the use of supplier finance programs. If adopted as proposed, this standard would require a buyer in a supplier finance program to disclose:

• The key terms of the program, including a description of the payment terms and assets pledged as security or other forms of guarantees provided (annual).
• The obligations that the buyer has confirmed as valid to the finance provider or intermediary, including the amount outstanding (interim and annual), the balance sheet presentation (annual), and the roll-forward information (annual).

As proposed, this standard would be applied retrospectively to all periods in which a balance sheet is presented, except for the amendment on roll-forward information, which should be applied prospectively. This standard would be effective for all entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on roll-forward information, which should be effective for fiscal years beginning after December 15, 2023.

The FASB expects to issue a final Accounting Standards Update (ASU) in September 2023. 

Segment reporting

The intent of this project is to improve segment disclosures in order to provide investors with more decision-useful information about the reportable segments of a public entity. The FASB indicates that the provisions in this project would be the “most significant change to segment reporting since the original issuance of the segment standard in 1997.” 

Disclosure improvements would include:

• Requiring disclosure of significant segment expenses based on the management approach;
• Expanding the interim period segment disclosure requirements;
• Clarifying that more than one measure of segment profit or loss may be disclosed; and
• Requiring segment disclosures for single-segment entities. 

An exposure draft was issued by the FASB in October 2022 with comments due December 20, 2022.

Disaggregation: Income statement expenses

This project aims to improve the decision usefulness of income statements through the disaggregation of certain expense captions. The FASB indicates that it is pursuing an approach to disaggregate certain specific amounts (potentially including employee compensation, depreciation, and amortization) from any relevant expense line items. For capitalizable amounts (such as inventory), the FASB is considering disaggregating the costs capitalized during the period (such as raw materials and labor) rather than the expense recognized. 

The FASB is expected to meet in early 2023 to discuss further details about this approach, with an exposure draft expected in the first half of 2023.

Targeted improvements to income tax disclosures

This project is intended to improve the transparency and decision usefulness of income tax disclosures. The FASB has revised the scope of this project to focus on enhancements to the rate reconciliation table and disaggregation of income taxes paid disclosure. 

Based on decisions that have been made so far by the FASB, the provisions in this project would:

• Require all entities to disaggregate income taxes paid by Federal, state and foreign and individual jurisdictions where income taxes paid is greater than five percent of total taxes paid.
• Require disclosure of specific categories in the rate reconciliation and specific reconciling items with an effect greater than five percent of the amount computed by multiplying pre-tax income by the applicable statutory tax rate.
• Require companies to provide a qualitative disclosure about the states that contribute to the majority of the effect of the state and local income tax, net of Federal income tax effect category.
• Require disclosure of income taxes paid in amounts that are net of refunds received.

The FASB is expected to issue an exposure draft in the first quarter of 2023.

Common control leases

This project addresses the following two issues related to leases between entities under common control: 

1. What terms and conditions an entity should consider for: (a) determining whether a lease exists and, if so, (b) the classification and accounting for that lease.
2. Accounting for leasehold improvements associated with leases between entities under common control.

The FASB has made a number of decisions on this project, including to:

• Provide a practical expedient for most private companies to use the written terms and conditions of a common control arrangement to determine whether a lease exists and, if so, the classification of and accounting for that lease.
• Amortize leasehold improvements associated with leases between entities under common control over their economic life, and account for a transfer of those leasehold improvements as an adjustment to equity when the lessee no longer controls the use of the underlying asset.

An exposure draft was issued by the FASB in November 2022 with comments due January 16, 2023.

Accounting for and disclosure of crypto assets

This project is intended to improve the recognition, measurement, presentation, and disclosure of digital assets. The FASB has made a number of decisions to date, including:  

• Crypto assets in the scope of this project must: (1) be an intangible asset; (2) not provide the holder with rights to, or claims on, underlying goods, services, or other assets; (3) be created or reside on a distributed ledger or blockchain; (4) be secured through cryptography; (5) be fungible.
• Crypto assets will be measured each period at fair value using the guidance in Topic 820, Fair Value Measurement.

The FASB is expected to discuss presentation and disclosure in December 2022 with an exposure draft expected in the first half of 2023.

Accounting for and disclosure of software costs

This project aims to modernize the accounting for software costs and enhance transparency about an entity’s software costs. The scope of this project includes recognition, measurement, presentation, and disclosure of costs to internally develop or acquire software. To date, the FASB has explored several high-level paths including requiring a single capitalization model, updating existing software cost accounting models, and expensing all software costs. 

The FASB held a non-public workshop in November 2022. The FASB will continue to research this topic and hold outreach with stakeholders to develop potential paths for discussion at a future FASB meeting.

Accounting for financial instruments with ESG-Linked features

The FASB has added a research project to its agenda on the accounting and disclosure of financial instruments with ESG-linked features. The FASB indicates that it has received feedback from its agenda consultation process that financial instruments linked to sustainability initiatives, indices or targets are becoming more common. Most stakeholder questions relate to sustainability-linked bonds and loans. Stakeholders have asked the FASB to consider how ESG-related provisions within financial instruments should be accounted for. 

Research on this project will continue and be brought to the FASB for a future agenda decision.

Center for Audit Quality update

SEC comment letter panel

A panel discussion was held that provided valuable insights into the SEC comment letter process, including common areas of focus and recent trends, to help companies prepare for the year-end reporting season. The panel discussed the most frequent areas of SEC staff comments including comments issued on Management‘s Discussion and Analysis (MD&A) and non-GAAP measures. The panel also discussed emerging areas of focus for the upcoming year that companies should pay close attention to when preparing their year-end disclosures. The panel included both current and former members of the SEC staff who also shared best practices and tips to better respond to SEC comment letters.

The panel discussed the SEC staff’s review process, noting that the SEC must review all public companies once every three years. Initial Public Offering registration statements do not follow this filing review mandate and are always reviewed before becoming effective.

A member of the SEC staff on the panel discussed the timing of 10-K reviews, indicating that the SEC generally will not issue an initial comment letter on a filing for a prior fiscal year after the year of filing has occurred. For example, generally the SEC staff will not issue an initial comment letter on a fiscal year end company’s 2021 10-K after December 2022. 

Best practices in responding to SEC comment letters include:

• If making new disclosures to respond to a comment in future filings, include that language in the comment letter response.
• Respond to each comment by the SEC specifically and order the response in a similar way so that the SEC staff can following clearly. 
• The company should update its contact information in the EDGAR database system so that any comment letters are accurately mailed to the right individuals.

The SEC staff indicated that it reviews all publicly available data about the company, not just the filings made with the SEC. This includes following companies on social media to make sure disclosures and information are consistent across all this publicly available information and in filings with the SEC.

The panel discussed top areas of comments from the SEC staff. Top areas of comments includes:

• MD&A (results of operations, liquidity, critical accounting estimates);
• Non-GAAP measures;
• Segment reporting;
• Macroeconomic issues;
• Climate change; and
• Internal controls over financial reporting.

Regarding MD&A comments, the panel indicated that the SEC staff continues to issue comments on company quantification disclosures. These disclosures usually take the form of a long sentence noting the overall changes in the financial statement line items. However, in many cases companies do not provide detailed disclosures about the specific drivers behind these movements or do not identify what caused the changes to occur. In addition, if applicable, these disclosures should identify any offsetting changes that may counter the overall impact on the financial statement line item. 

The panel indicates that the SEC staff continues to comment on segment reporting with a focus on the application of Codification Topic 280, Segment Reporting, and the identification of the operating segments. The SEC staff wants to make sure identification of the operating segments is truly consistent with:

• How the company manages itself internally;
• Who is the Chief Operating Decision Maker and its direct reports; and
• How the company budgets are done and managed. 

The panel also cautioned that when using key performance indicators in SEC filings and publicly available materials, these measures should be clearly defined, explained in detail, and consistently used by the company.

The panel discussed emerging issues the SEC staff has commented on with a focus of more disclosure given the current uncertain economic times. These topics include inflation, supply chain issues, and Russia’s Invasion of Ukraine. The panel urged conference participants to review Sample Letters issued publicly by the Division of Corporation Finance (Corp Fin), including:

• Sample Letter to Companies Regarding Disclosures Pertaining to Russia’s Invasion of Ukraine and Related Supply Chain Issues;
• Sample Letter to Companies Regarding Climate Change Disclosures; 
• Sample Letter to China-Based Companies; and
• Sample Letter to Companies Regarding Recent Developments in Crypto Asset Markets.

Regarding the sample letter regarding Russia’s invasion of Ukraine, the panel urged all companies to consider the guidance in this letter even if they don’t have material operations in Russia, Ukraine, or Belarus. This guidance discusses possible disclosures regarding supply chain issues and heightened cybersecurity risks.

The panel also urged conference participants to review previously issued guidance on the COVID-19 global pandemic, including the following CF Disclosure Guidance topics published by Corp Fin:

• Topic 9: Coronavirus (COVID-19); and
• Topic 9A: Coronavirus (COVID-19) — Disclosure Considerations Regarding Operations, Liquidity, and Capital Resources.

This guidance provides Corp Fin’s views regarding disclosure and other securities law obligations that companies should consider with respect to the COVID-19 and related business and market disruptions. While the COVID-19 pandemic has evolved, companies should still consider for disclosure information about:

• How its business has evolved or operates post-COVID 19; 
• Changes made to business operations as a result of the pandemic; 
• Resulting macroeconomic impacts on the business and a discussion of the “new normal”; and
• Impacts on wage costs, return to work plans or issues, liquidity debt levels given higher interest rates, and the impacts of higher energy costs.

The panel urged conference participants to consider the guidance in the SEC staff’s recently issued guidance in its updated Compliance and Disclosure Interpretation, Non-GAAP Financial Measures. This interpretation provides guidance on many of the non-GAAP financial measures that Corp Fin comments on, including:

• Business combination transactions;
• EBIT and EBITDA;
• Undue prominence;
• Reconciliation to GAAP; and
• Segment information.

Regarding future comment letters, the panel believes the SEC staff will focus on the following areas:

• Crypto assets;
• Disclosures regarding the impact of the passage of the Inflation Reduction Act of 2022;
• Impairment and early warning MD&A disclosures, including discussion of material risks and uncertainties;
• Impairment testing timing and whether significant adverse changes have arisen that require interim testing; and 
• Risk management disclosures.

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