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Financial Reporting and Regulatory Update

Fourth Quarter 2017

From the SEC

Federal Income Tax Reform

AICPA Conference on Current SEC and PCAOB Developments – Dec. 4-6, 2017

The annual AICPA Conference on Current SEC and PCAOB Developments was held in Washington, D.C., Dec. 4-6, 2017. The conference included remarks from the SEC chairman and the chief accountant as well as professionals from the SEC’s Office of the Chief Accountant (OCA) and the Division of Corporation Finance (Corp Fin). Representatives from the PCAOB and the FASB also addressed the conference.

Themes at the conference included the implementation of major accounting standards (such as revenue recognition, lease accounting, and credit losses), cybersecurity and emerging technologies, capital formation simplifications, and – in light of recent legislation – the impact of tax reform.

See highlights from the conference in the Crowe e-communication, “Headline Speeches From the 2017 AICPA Conference on SEC and PCAOB Developments.”

New Guidance on Income Tax Reform

With the Tax Cuts and Jobs Act (tax reform law) signed into law by President Donald Trump on Dec. 22, 2017, the SEC’s OCA and Corp Fin staff issued interpretive guidance for public companies, auditors, and other stakeholders to consider as they contemplate disclosures for investors related to the accounting impacts of the tax reform law.

The interpretive guidance includes a new SAB and a new Compliance and Disclosure Interpretation (C&DI).

  • SAB 118 addresses the following:
    • Fact patterns where the accounting for changes in tax laws or tax rates under ASC Topic 740 is incomplete upon issuance of an entity’s financial statements for the reporting period in which the tax reform law is enacted (that is, reporting periods that include Dec. 22, 2017) are addressed.
    • During the reporting period that includes Dec. 22, 2017, for those tax effects in which the accounting under ASC Topic 740 is incomplete, the income tax effects of the tax reform law should be reported as a provisional amount based on a reasonable estimate (to the extent a reasonable estimate can be determined).
    • The provisional amount is subject to adjustment during a measurement period, until the accounting under ASC 740 is complete.
    • The measurement period should not extend beyond one year from the tax reform law’s enactment date.
    • Supplemental disclosures should accompany the provisional amounts, including the reasons for the incomplete accounting, the additional information or analysis that still needs to occur, and other information relevant to why the registrant was not able to complete the accounting required under ASC 740 in a timely manner.
  • Question 110.02 was added to the C&DIs for Item 2.06 (“Material Impairments”) on Form 8-K, and it addresses whether the obligation to file under Item 2.06 of Form 8-K is triggered due to the remeasurement of a deferred tax asset (DTA) in order to incorporate the effects of the newly enacted tax rates or other provisions of the tax reform law, and how use of the measurement period approach in SAB 118 affects this filing obligation.

For more on this topic, see the Crowe Horwath LLP articles: “Financial Reporting for Tax Reform: The SEC and FASB Weigh In” released on Jan. 23, 2018, and “Securities and Exchange Commission (SEC) Provides Clarity and Assistance on Income Tax Reform,” released on Dec. 28, 2017.

Major Accounting Standards Implementation

AICPA Conference on Current SEC and PCAOB Developments – Dec. 4-6, 2017

As previously discussed, a topic at the annual AICPA Conference on Current SEC and PCAOB Developments was implementation of the major accounting standards.

See highlights from the conference in the Crowe e-communication “Headline Speeches From the 2017 AICPA Conference on SEC and PCAOB Developments.”

Financial Executives International (FEI) 36th Annual Current Financial Reporting Issues Conference, Wesley Bricker – Nov. 14, 2017

SEC Chief Accountant Wesley R. Bricker addressed the FEI 36th Annual Current Financial Reporting Issues Conference on Nov. 14, 2017, where he discussed “Effective Financial Reporting in a Period of Change.” The topics that he covered related to the implementation of the revenue, leases, and credit losses accounting standards and others.

Discussing the revenue standard, Bricker cautioned preparers to consider internal controls and documentation that address management’s judgments and estimates required for implementation and application. He encouraged audit committees to pay close attention to the status of implementation reported to them by management and by the auditors. He also announced his expectation that companies should be in a position, through third- and fourthquarter reporting, to disclose “the anticipated impact, at least qualitatively and directionally, of adoption of the revenue standard.”

For leases, Bricker emphasized the need for preparers to begin identifying and working through accounting questions for lease arrangements, and he highlighted a best practice to concurrently (rather than sequentially) implement the leases and revenue standards.

Related to credit losses, Bricker covered factors that the FASB considered in developing the standard, such as these:

  • Bias-free financial reporting that is transparent in all market cycles
  • Credit loss estimates that include forward-looking information and timelier recognition
  • Total economics of lending transactions, including both credit losses and interest income (which will continue to be separately reported in the financial statements)
  • Financial statement preparation costs – noting that many loss-estimation methods used today will be appropriate under the new standard, accompanied by changes to inputs and assumptions

Financial Reporting Manual Update

Corp Fin updated its Financial Reporting Manual (FRM) on Dec. 1, 2017. The revisions to the FRM address the timing of applying new accounting standards to pro forma financial information and the adoption of new accounting standards after an issuer loses its emerging growth company (EGC) status.

Elimination of Guidance on Available for Sale (AFS) Equity Securities

On Nov. 29, 2017, the SEC staff issued SAB 117, to eliminate guidance in SAB Topic 5.M, “Other Than Temporary Impairment of Certain Investments in Equity Securities.” Because FASB ASC Topic 321, “Investments – Equity Securities,” (codified by ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”) eliminates the AFS classification for investments in equity securities, the SEC guidance in SAB Topic 5.M on that security type and classification is no longer applicable.

Subsequent to an SEC registrant adopting ASC Topic 321, SAB Topic 5.M will no longer apply.

Capital Formation Simplifications

AICPA Conference on Current SEC and PCAOB Developments – Dec. 4-6, 2017

As previously discussed, a topic at the annual AICPA Conference on Current SEC and PCAOB Developments was capital formation simplifications.

See highlights from the conference in the Crowe e-communication “Headline Speeches From the 2017 AICPA Conference on SEC and PCAOB Developments.”

Regulation S-K Simplification

The SEC released, on Oct. 11, 2017, a proposal, “FAST Act Modernization and Simplification of Regulation S-K,” for public comment. Requirements of the Fixing America’s Surface Transportation Act of 2015 present the SEC with an opportunity to streamline its entire disclosure framework. Among the proposed changes to Regulation S-K, registrants would no longer be required to provide, under certain circumstances, a discussion of the earliest year when three years are presented in Item 303, Management’s Discussion and Analysis (MD&A).

The proposal would make the confidential treatment process more efficient for registrants and SEC staff without changing the responsibilities of registrants with regard to personally identifiable information as well as immaterial and competitively harmful information contained in exhibits. Registrants would no longer be required to first seek approval for confidential treatment from the SEC on specified matters.

In addition, a description of property would no longer be required if the property is not material to the registrant, and material contracts outside the ordinary course of business that were entered into within a two-year window of filing a registration statement or report would be required only for new registrants, rather than all registrants.

In order to eliminate various incorporation by reference provisions in SEC rules and regulations, registrants would be required to include hyperlinks in current filings to the incorporated information that was previously filed on the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.

In the required exhibit that includes a list of the registrant’s subsidiaries, the proposal would require disclosure of Legal Entity Identifiers (LEIs) for the registrant and its subsidiaries to the extent the LEI has been obtained. LEIs are alphanumeric codes used across markets and jurisdictions to track entities and understand entities’ corporate structure.

Comments were due Jan. 2, 2018.

Technology And Cybersecurity Matters

SEC Chairman Jay Clayton on Cryptocurrencies and Initial Coin Offerings (ICOs) – Dec. 11, 2017

On Dec. 11, 2017, SEC Chairman Jay Clayton issued a public statement to highlight the rapid growth in the cryptocurrency and ICO markets. In his statement, Clayton provided his views on the cryptocurrency and ICO markets, including considerations for both Main Street investors and market professionals in these markets. He shared that, to date, no ICOs have been registered with the SEC, and no exchange-traded products (such as exchange-traded funds) holding cryptocurrencies or other assets related to cryptocurrencies have been approved for listing and trading by the SEC. He also emphasized securities law matters that should be considered by market professionals (such as lawyers, accountants, and consultants) when evaluating transactions in the cryptocurrency and ICO markets. Finally, he provided some sample questions for investors to consider when evaluating a cryptocurrency or ICO investment opportunity.

AICPA Conference on Current SEC and PCAOB Developments – Dec. 4-6, 2017

As previously discussed, a topic at the annual AICPA Conference on Current SEC and PCAOB Developments was cybersecurity and emerging technologies.

See highlights from the conference in the Crowe e-communication “Headline Speeches From the 2017 AICPA Conference on SEC and PCAOB Developments.”

FEI 36th Annual Current Financial Reporting Issues Conference, Wesley Bricker – Nov. 14, 2017

At the previously mentioned FEI conference, where Bricker delivered his speech “Effective Financial Reporting in a Period of Change,” he covered emerging technology. Specifically, Bricker encouraged the accounting profession to understand distributed ledger (or blockchain) technology and the potential risks for investors. He noted that the SEC’s Office of the Chief Accountant is investing time to understand the technology under the framework of the SEC’s rules and regulations.

More on this technology can be found in the SEC’s “Investor Bulletin: Initial Coin Offerings.”

Washington, D.C., Stephanie Avakian (Co-director, SEC Division of Enforcement) – Oct. 26, 2017

During an Oct. 26, 2017, speech, Stephanie Avakian, co-director in the SEC’s Division of Enforcement, spelled out the division’s priorities for retail investors (spearheaded by the newly created Retail Strategy Task Force) and cyber matters (the focus of the newly formed Cyber Unit). Avakian discussed Corp Fin’s reminders to registrants that material information regarding cyberrisk may be required in Management’s Discussion and Analysis and Risk Factor disclosures. She said:

“In an era where nearly every company is dependent on computer systems to operate their business, it is frequently necessary to provide meaningful and timely disclosures regarding cyber risks and incidents. These disclosures are often material on their own or necessary in order to make other disclosures, in light of the circumstances under which they are made, not misleading. The guidance issued by the Corp Fin staff in 2011 is principles based and remains an important indication of how issues related to cybersecurity should be disclosed in SEC filings. We recognize this is a complex area subject to significant judgment, and we are not looking to second-guess reasonable, good faith disclosure decisions, though we can certainly envision a case where enforcement action would be appropriate.”

Auditor’s Reporting Model (Arm)

AICPA Conference on Current SEC and PCAOB Developments – Dec. 4-6, 2017

The ARM was another topic discussed at the annual AICPA Conference on Current SEC and PCAOB Developments by the SEC chairman and OCA panel, as well as by representatives from the PCAOB.

See highlights from the conference in the Crowe e-communication, “Headline Speeches From the 2017 AICPA Conference on SEC and PCAOB Developments.”

FEI 36th Annual Current Financial Reporting Issues Conference, Wesley Bricker – Nov. 14, 2017

At the FEI conference where Bricker delivered his speech “Effective Financial Reporting in a Period of Change,” he covered the recently SECapproved ARM standard from the PCAOB. In particular, he discussed the requirement to disclose critical audit matters (CAMs) during the second phase of implementation, which is effective for large accelerated filers in audits of fiscal years ending on or after June 30, 2019.

Bricker recommended a few questions that audit committees could ask when planning for implementation of the audit standard:

  • “What would the critical audit matters be this year?
  • “What would be the close calls?
  • “When could those matters have been raised, and which ones could have been identified at the start of the audit cycle?
  • “What does the auditor expect to say about those matters?
  • “When would we expect to see a draft report or at least a draft of the critical audit matters?”

Approval of the PCAOB’s ARM Standard

On Oct. 23, 2017, the SEC approved PCAOB auditing standard (AS) 3101, “The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion,” which the PCAOB adopted on June 1, 2017. The SEC previously issued a release (No. 34-81187) and obtained comments from stakeholders on the auditing standard. The final standard will change the auditor’s report significantly.

Effective dates for the standard will occur in two phases. In the first phase, the auditor’s report will disclose auditor tenure and make other improvements including clarifying the auditor’s responsibilities. The first phase applies to audit reports issued on financial statements of public companies for fiscal years ending on or after Dec. 15, 2017, which first applies to Dec. 31, 2017, for calendar year-end public companies.

In the second phase, the auditor is required to include critical audit matters in the auditor’s report. A CAM is a matter that is communicated or required to be communicated to the audit committee and that 1) relates to accounts or disclosures that are material to the financial statements, and 2) involves especially challenging, subjective, or complex auditor judgment. The second phase is effective for fiscal years ending on or after June 30, 2019, for large accelerated filers. For all other entities, the second phase is effective for fiscal years ending on or after Dec. 15, 2020.

Non-GAAP Measures

AICPA Conference on Current SEC and PCAOB Developments – Dec. 4-6, 2017

At the annual AICPA Conference on Current SEC and PCAOB Developments, the Corp Fin panel discussed the status of non-GAAP measures.

See highlights from the conference in the Crowe e-communication “Headline Speeches From the 2017 AICPA Conference on SEC and PCAOB Developments.”

Updated Compliance and Disclosure Interpretations

Corp Fin, on Oct. 17, 2017, updated its C&DIs on non-GAAP measures by adding two questions related to business combinations:

  • Question 101.01 clarifies that financial measures included in forecasts provided to a financial adviser and used in connection with a business combination transaction are not non-GAAP financial measures if they meet certain criteria identified in the C&DIs.
  • Question 101.02 clarifies that the exemption from Regulation G and Item 10(e) of Regulation S-K for non-GAAP measures disclosed in communications relating to a business combination transaction does not extend to the same non-GAAP measures disclosed in registration statements, proxy statements, and tender offer statements.

New Commissioners

On Dec. 21, 2017, the U.S. Senate confirmed two new SEC commissioners, Hester Peirce and Robert J. Jackson Jr., which means that all seats at the commission are full for the first time since 2015.