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Financial Reporting and Regulatory Update

Fourth Quarter 2019

From the SEC

AICPA Conference on Current SEC and PCAOB Developments

SEC presents at the AICPA Conference on Current SEC and PCAOB Developments

The AICPA held its annual Conference on Current SEC and PCAOB Developments  in Washington, D.C., Dec. 9-11, 2019.

Chair Jay Clayton and Chief Accountant Sagar Teotia kicked off the SEC’s participation with a joint discussion of multiple topics, including the role accountants and auditors play in protecting investors and supporting capital formation. Other topics they addressed included the importance of audit committees, the transition away from LIBOR, non-GAAP measures, the SEC’s Office of the Chief Accountant’s (OCA) consultation process, and the implementation of new accounting standards. SEC representatives delivered remarks:

  • Teotia – statement on background and role of the office of the chief accountant and the office’s ongoing priorities, including engagement with stakeholders; oversight of the FASB; new accounting standards and current FASB standard-setting; oversight of the PCAOB; international accounting, audit, and disclosure matters; staff guidance and other initiatives; and other significant areas such as internal control over financial reporting, audit committees, and technology and innovation
  • Louis J. Collins, professional accounting fellow – remarks on current state, initial observations, and comparability of critical audit matters implementation
  • Lauren K. Alexander, professional accounting fellow – remarks on consultations related to the new revenue recognition standard, specifically principal versus agent guidance, and observations from a consultation on the new credit losses standard
  • Aaron Shaw, professional accounting fellow – remarks on application of the revenue standard to a sale and leaseback transaction and determination of whether a registrant is the primary beneficiary of a variable interest entity
  • Jamie N. Davis, professional accounting fellow – remarks on discontinuation of LIBOR, including effects on cash flow hedges, efforts of the FASB to address the discontinuation of LIBOR, and amendments to equity-classified preferred stock instruments that use LIBOR
  • Nipa Patel, professional accounting fellow – remarks on audit standard-setting including the SEC’s oversight responsibilities, PCAOB standard-setting, and international audit standard-setting
  • Erin Bennett, professional accounting fellow – remarks on application of equity method accounting, implementation of the new lease accounting standard, and collectability of lease payments
  • Susan M. Mercier, professional accounting fellow – remarks on consultations related to the new revenue recognition standard, specifically related to identification of performance obligations
  • Vassilios Karapanos, associate chief accountant – remarks on auditor independence related to lending relationships and frequently asked questions on independence updated during 2019

Corp Fin presents at the AICPA Conference on Current SEC and PCAOB Developments

At the AICPA Conference on Current SEC and PCAOB Developments, SEC Division of Corporation Finance (Corp Fin) members, including William Hinman, director; Kyle Moffatt, division chief accountant; Patrick Gilmore, deputy chief accountant; Lindsay McCord, deputy chief accountant; and Craig Olinger, senior adviser to the chief accountant, discussed the following topics:

  • The staff review of filings to understand, but not necessarily issue comments on, registrant disclosures regarding:
    • Cybersecurity
    • Brexit
    • LIBOR
    • Sustainability reporting
  • Status of various rulemakings (for example, acquisition and dispositions of businesses, guarantor financial statements, and the definition of accelerated and large accelerated filer)
  • CAMs and staff filing reviews
  • Impact of stock buybacks on compensation discussion and analysis
  • Definition of a business
  • Observations on waiver requests under Rule 3-13
  • Non-GAAP measures
  • Disclosures related to supplier finance arrangements, particularly within the context of management’s discussion and analysis
  • Predecessor financial statements
  • International reporting issues

Public statements and announcements

Small Business Capital Formation Advisory Committee meeting

The Small Business Capital Formation Advisory Committee met on Nov. 12, 2019, at the SEC headquarters in Washington, D.C. At the meeting, the committee discussed harmonization of the exempt offering framework and of pooled investment funds, and it heard presentations on access to capital for entrepreneurs, the small-business credit survey, and retail access to private markets.

The meeting was recorded and is archived on the committee’s website.

Staffing updates

The SEC appointed John Vanosdall and Paul Munter deputy chief accountants in the OCA as announced on Dec. 3, 2019. Vanosdall will head the OCA’s accounting group. Most recently, he was a partner at PricewaterhouseCoopers LLP, where he concentrated on a range of technical accounting and mergers and acquisitions matters. Previously, he served as an SEC professional accounting fellow. Munter will lead the OCA’s international matters activities. Munter joins the SEC from the University of Colorado Boulder, where he was a senior instructor of accounting. He is a retired partner from KPMG LLP, where he served as the lead technical partner for the U.S. firm’s international accounting and International Financial Reporting Standards areas.

On Dec. 2, 2019, the SEC named Kristina Littman chief of the Division of Enforcement’s Cyber Unit. The Cyber Unit focuses on protecting investors and markets from cyberrelated misconduct. Littman joined the SEC’s Division of Enforcement in 2010 as a staff attorney. Since then, she has held senior attorney positions in the Market Abuse Unit and the Trial Unit.

Rules and guidance

Proposal to adopt resource extraction disclosure rules

On Dec. 18, 2019, the SEC issued for public comment proposed rules, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, that would require resource extraction issuers to disclose payments made to foreign governments or the U.S. federal government for the commercial development of oil, natural gas, or minerals. The disclosures would include company-specific project-level payment information.

Replacing the vacated 2016 rules, the proposed rules include several changes:

  • Changes the definition of “project” to require disclosure at the national and major subnational political jurisdiction
  • Changes the definition of “not de minimis” to include both a project threshold and an individual payment threshold
  • Provides two new conditional exemptions for situations when a foreign law or  a preexisting contract prohibits the required disclosure
  • Includes an exemption for smaller reporting companies and emerging growth companies
  • Modifies the definition of “control” to exclude entities or operations in which an issuer has a proportionate interest
  • Limits the liability for the required disclosure by deeming the payment information to be furnished to, but not filed with, the SEC

Comments are due 60 days after publication in the Federal Register.

Proposal to update accredited investor definition

The SEC, on Dec. 18, 2019, issued for public comment proposed amendments to the definition of “accredited investor.” The proposal seeks to expand and improve the definition of “accredited investor” to better identify institutional and individual investors that have the knowledge and expertise to participate in the private capital markets. The proposed amendments would permit more investors to participate in private offerings by adding new categories of natural persons that may qualify as accredited investors. Also, the proposal would increase the number of entities that may qualify as accredited investors.

Comments are due on Feb. 24, 2020.

Staff guidance on CECL

On Nov. 19, 2019, the SEC issued Staff Accounting Bulletin (SAB) 119: “Accounting for Loan Losses by Registrants Engaged in Lending Activities Subject to FASB ASC Topic 326.” Presented in a question and answer format, SAB 119 updates existing staff guidance on developing a systematic methodology for estimating credit losses, and it explains the documentation the staff typically would expect from registrants in support of estimates of current expected credit losses (CECL) for lending activities, when material. SABs represent staff interpretations and practices and are not official SEC rules or interpretations. SAB 119 is applicable upon a registrant’s adoption of Topic 326, and nothing in the SAB should be read to accelerate or delay the effective dates of the standard as modified by the FASB.

Proposal to amend proxy rules

On Nov. 5, 2019, the SEC voted to propose amendments to modernize the rule that governs the process for shareholder proposals to be included in a company’s proxy statement. It also voted to propose amendments to the rules governing proxy solicitations to increase the quality of the disclosure about material conflicts of interest that proxy voting advice businesses provide to their clients.

The shareholder proposal amendments update the criteria, including the ownership requirements, for a shareholder to be eligible to require a company to include a proposal in its proxy statement. Under the proposed amendments, the $2,000 minimum ownership threshold is maintained; however, to take advantage of that threshold, shares must have been held for at least three years to prove long-term investment in the company. The proposed amendments also clarify that a single person may not submit multiple proposals at the same shareholder’s meeting on behalf of different shareholders. Additionally, the amendments update the support levels that a proposal would need to achieve in its first submission to be eligible for resubmission in the following three years.

The proxy voting advice proposal provides that companies that file definitive proxy materials 25 days or more in advance of the relevant meeting have an opportunity for a period of review and feedback through which companies and other soliciting parties would be able to identify errors in the proxy voting advice. This proposal is aimed at improving accuracy and transparency of information provided by proxy voting advice businesses to investors.