Financial Reporting and Regulatory Update

Fourth Quarter 2020

From the SEC

AICPA Conference on Current SEC and PCAOB Developments

Focus of chief accountant

The AICPA held its annual Conference on Current SEC and PCAOB Developments virtually from Washington, D.C., Dec. 7-9, 2020. Chief Accountant Sagar Teotia kicked off the SEC’s participation, on Dec. 7, with a discussion of multiple topics, including the important role accountants and auditors play in protecting investors and investor confidence.

In his keynote speech Teotia addressed the focus of the SEC’s Office of the Chief Accountant (OCA) on high-quality financial reporting during an unusual year. Teotia acknowledged that 2020 has been a challenging year considering the uncertainty from and impacts of the COVID-19 pandemic and that investors have benefited from high-quality financial information.

He said that the OCA has taken quick and proactive steps to address complex accounting, reporting, and other financial matters in response to the pandemic to continue to foster high-quality financial reporting. Teotia detailed actions taken including issuing public statements, providing staff views on complex issues, working directly and closely with the FASB and the PCAOB, addressing issues related to quality, and playing a key role in rulemaking efforts.

During the year, the OCA has consulted on and addressed topics including interpretation of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), accounting for loan participation agreements, application of the TDR guidance to certain loans affected by COVID-19, application of the asset impairment and leasing frameworks to similarly affected assets, issues related to capital-raising transactions, accounting standards implementation issues, and other complex issues.

Office of the chief accountant staff remarks

After the chief accountant outlined the SEC’s priorities with respect to oversight of the FASB, various members of OCA staff delivered prepared speeches at the AICPA conference, and several of the speeches addressed the staff’s involvement with consultations during the past year on new and existing accounting standards. Speakers and topics included:

  • Kevin Cherrstrom, professional accounting fellow, remarked on consultations related to performance obligations under the revenue recognition standard and presentation of cash received from a vendor in the statement of cash flows, including gross versus net cash flows.
  • Geoff Griffin, professional accounting fellow, remarked on principal versus agent guidance and accounting for right-of-use assets, including abandonment, under the leases standard.
  • Jeffery Joseph, professional accounting fellow, remarked on implementation and post-implementation of the auditor’s reporting model under PCAOB AS 3101 specifically related to CAMs, including discussion of boilerplate language versus audit-specific language.
  • Sheena Lam, professional accounting fellow, remarked on monitoring group recommendations to strengthen the international audit and ethics standard- setting system and recent amendments to auditor independence rules.
  • Jeffrey Nick, professional accounting fellow, remarked on equity method investments, determining significant influence, and consolidation under the voting interest entity model.
  • Jillian Pearce, professional accounting fellow, remarked on discontinuation of the London Interbank Offered Rate (LIBOR), evaluating interest-rate reset features, and principal versus agent guidance under the revenue standard.
  • Damon Romano, professional accounting fellow, remarked on determining the primary beneficiary in a variable interest entity and customer accounting for consideration received from a vendor or supplier.

Focus of the Division of Corporation Finance

At the AICPA conference, SEC Division of Corporation Finance (Corp Fin) members, including Lindsay McCord, chief accountant; Patrick Gilmore, deputy chief accountant; and Craig Olinger, senior adviser to the chief accountant, provided an overview of recent activities at Corp Fin that affect accounting and reporting for the 2020 year-end filings. They discussed the following topics:

  • Response to COVID-19 and previously issued releases on disclosure guidance with emphasis on:
    • Disclosures of how the company has responded to the pandemic and what management is doing to plan for future impacts
    • Cautioning against using boilerplate COVID-19 disclosures
    • Careful consideration of non-GAAP financial measures that include COVID-19 items
    • Non-GAAP measures and key performance indicators
  • Current comment letter trends in the areas of revenue recognition and segments
  • Special-purpose acquisition companies
  • China-based issuers
  • Personnel changes at Corp Fin
  • Recent rulemakings

COVID-19 resources and guidance

Coronavirus response

The SEC is continuing to update its COVID-19 response page, which describes how the SEC is addressing the impact of COVID-19 through maintaining SEC operations continuity; monitoring markets and engaging with market participants; providing guidance and targeted regulatory assistance and relief, enforcement, examinations, and investor education; and extending comment periods for certain pending actions and rules. The page includes links to all of the current resources and guidance available from the SEC.

Report on U.S. credit market interconnectedness and COVID-19

The SEC released, on Oct. 5, 2020, a report titled “U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock.” It examines the origination, distribution, and secondary market flow of credit across U.S. credit markets and addresses how credit market interconnections operated during the COVID-19 pandemic. The report also discusses certain credit market interdependencies and key stress points exposed by the COVID-19 shock. While the report is intended to inform policymakers seeking to improve our financial markets, it does not make policy recommendations.

Comments on the issues raised in the report may be submitted electronically to and will be posted unchanged on the SEC’s website.

Roundtable on U.S credit markets interconnectedness and risk

The SEC hosted, on Oct. 14, 2020, Roundtable on Interconnectedness and Risk in U.S. Credit Markets to discuss the issues raised in the report “U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock,” released on Oct. 5, 2020. The event was livestreamed and included a fireside chat with Chairman Jay Clayton and two panel discussions. The first panel discussion focused on market perspective and the impact of COVID-19 on the six credit markets covered in the report. The second panel discussion addressed the interconnectedness of the market from a regulatory perspective, including which areas of the markets performed well, which showed stress, and where vulnerabilities might still exist.

Rules and guidance

Resource extraction issuers payment disclosures

On Dec. 16, 2020, the SEC adopted final rules to require resource extraction issuers that are required to file reports under the Securities Exchange Act of 1934 Section 13 or 15(d) to disclose payments made to the U.S. federal government or foreign governments for the commercial development of oil, natural gas, or minerals. The rules are designed to:

  • Increase the transparency of payments to governments for the purpose of the commercial development of their oil, natural gas, and minerals
  • Comply with the Congressional Review Act

The rules will require a domestic or foreign reporting issuer to disclose such payments made by the issuer or a subsidiary or entity controlled by the issuer, and they will require disclosure of company-specific, project-level payment information. The rules also define certain terms, provide conditional exemptions, and extend the deadline for providing the payment disclosures.

The final rules will be effective March 16, 2021.

Key market infrastructure for securities market data

The SEC adopted, on Dec. 9, 2020, a final rule modernizing the infrastructure for market data collection, consolidation, and dissemination for exchange-listed national market system (NMS) stocks. The changes reflect an “update and significantly expand the content of NMS market data to better meet the diverse needs of investors in today’s equity markets.” The SEC has not extensively updated the rules addressing the content and dissemination of NMS market data since original implementation in the late 1970s. Under the rules, competitive forces are included in the national market system, which will increase the NMS market data and potentially benefit all market participants.

These rules are the latest initiative in the SEC’s efforts to modernize the national market system to better fit the needs of investors and other market participants.

The rule will be effective 60 days after publication in the Federal Register.

Proposal for board diversity

On Dec. 4, 2020, Nasdaq filed with the SEC a proposal to adopt new listing rules related to board diversity and disclosure to address findings that a link exists between diverse boards and better financial performance and corporate governance. These proposed standards focus on clearer disclosures of a company’s board composition and increased information provided to investors that listed companies are considering diversity when selecting directors.

Under the proposal, most Nasdaq listed companies would be required to have, or explain why they do not have, at least two directors with diverse backgrounds. In accordance with the proposal, boards should include at least one woman and one LGBTQ person or person who is an underrepresented minority. All listed companies also will be required to disclose consistent and clear diversity statistics regarding their board of directors.

If the proposal is approved by the SEC, Nasdaq would become the first major U.S. stock exchange to require boardroom diversity. Companies would have up to one year to disclose board diversity statistics, and the board composition diversity requirement would need to be met within five years, depending on the size of the company.

Nasdaq’s proposed changes to exchange listing rules are subject to SEC review and a public comment period.

Comments were due Jan. 4, 2021.

Proposed changes to compensatory securities offering framework

On Nov. 24, 2020, the SEC proposed amendments to Rule 701 of the Securities Act of 1933 as well as to Form S-8, the Securities Act registration statement for compensatory offerings by reporting issuers. Rule 701 provides an exemption from registration for the issuance of compensatory securities by nonreporting issuers.

Additionally, the SEC proposed rules to permit, temporarily and subject to certain conditions, an issuer to provide equity compensation to certain workers who provide services available through the issuer’s technology-based marketplace platform.

Significant changes in compensatory offerings and composition of the workforce have happened since the SEC last amended Rule 701 and Form S-8. The proposed amendments are designed to modernize the framework for compensatory securities offerings, allowing employees and other workers to receive equity compensation from their company while maintaining important investor protections.

Comments on the proposed rule are due Feb. 9, 2021.

MD&A and other financial disclosures

The SEC, on Nov. 19, 2020, adopted amendments that will simplify and enhance certain financial disclosure requirements in Regulation S-K. The amendments are expected to eliminate duplicative disclosures and modernize and improve management’s discussion and analysis (MD&A) for the benefit of investors while simplifying compliance efforts for registrants. Specifically, the requirement for selected financial data (item 301) has been eliminated, the requirement to disclose supplementary (quarterly) financial information (item 302) has been eliminated unless there has been a material retrospective change, and MD&A (item 303) requirements have been amended.

Changes to item 303 include clarifying disclosure requirements for liquidity and capital resources, streamlining disclosure requirement for results of operations, adding a new required item for critical accounting estimates that previously was part of staff interpretative guidance, replacing a separate requirement for off balance sheet arrangements with a requirement to discuss such obligations in a broader context, eliminating tabular disclosure of contractual obligations, and streamlining required information regarding interim periods.

The rule will be effective Feb. 10, 2021. Registrants are required to comply with the rule beginning with the first fiscal year ending on or after Aug. 9, 2021.

Transitional guidance on Regulation S-K Items 101, 103 and 105

Corp Fin issued, on Nov. 5, 2020, “Transitional FAQs Regarding Amended Regulation S-K Items 101, 103, and 105,” addressing guidance on the disclosure requirements and related rules adopted in the “Modernization of Regulation S-K Items 101, 103, and 105” final rule (Securities Act Release No. 33-10825). The amendments to modernize the description of business (item 101), legal proceedings (item 103), and risk factor disclosures (item 105) are effective Nov. 9, 2020. Corp Fin’s guidance answers three questions and provides views on transition to these new rules. Corp Fin also released, on Nov. 6, 2020, a Small Entity Compliance Guide that summarizes and explains the final rule requirements.

Exempt offering framework

On Nov. 2, 2020, the SEC amended its rules to address gaps and complexities in the exempt offering framework. The amendments are designed to promote capital formation and expand investment opportunities while preserving or improving investor protections as well as increasing access to capital for issuers.

In general, the amendments:

  • Establish – in one broadly applicable rule – the ability of issuers to move from one exemption to another
  • Expand the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and adjust certain individual investment limits
  • Provide specific rules governing certain offering communications, including permitting some “test-the-waters” and “demo day” activities
  • Standardize certain disclosure and eligibility requirements and bad actor disqualification provisions

The final rules are effective March 15, 2021, except for certain rules and the amendments to the introductory paragraph in the “Optional Question and Answer Format for an Offering Statement” section of Form C, which are effective from Jan. 14, 2021, until March 1, 2023.

Auditor independence rules

On Oct. 16, 2020, the SEC issued final amendments to codify certain staff consultations and update certain aspects of its auditor independence framework. To address the significant changes in the capital markets and those who participate in those markets, the amendments more effectively structure the independence rules and analysis so that relationships and services that would not pose threats to an auditor’s objectivity and impartiality do not trigger nonsubstantive rule breaches or potentially time-consuming audit committee review of nonsubstantive matters.

Among other changes, the amendments:

  • Revise the definitions of “affiliate of the audit client” and “investment company complex” to address specific affiliate relationships, including entities under common control
  • Shorten the lookback period for domestic first-time filers to assess compliance with independence standards by amending the definition of audit and professional engagement period
  • Establish the concept of beneficial owners with significant influence to replace substantial stockholders in the business relationships rule
  • Update the transition framework to address merger and acquisition transactions

The rule will be effective June 9, 2021.

Shareholder proposal rule

The SEC, on Sept. 23, 2020, adopted amendments to the shareholder proposal rule included in Exchange Act Rule 14a-8. The amendments seek to balance the interests of shareholders who submit proposals with the costs a company and other shareholders bear when the proposals are included in the company’s proxy statement. The final rules apply to any proposal submitted for an annual or special meeting to be held on or after Jan. 1, 2022, and also provide for a transition period with respect to certain revised ownership thresholds for proposals submitted for an annual or special meeting to be held prior to Jan. 1, 2023.

Quotations for OTC securities

The SEC adopted, on Sept. 16, 2020, amendments to Exchange Act Rule 15c2-11. The amendments enhance disclosure and investor protection in the over-the-counter (OTC) market by requiring that broker-dealers do not publish quotations for an issuer’s security when current issuer information is not publicly available, subject to certain exceptions.

The SEC says the amendments:

  • Provide greater transparency to investors and other market participants by requiring that information about the issuer and its security be current and publicly available before a broker-dealer can begin quoting that security.
  • Limit broker-dealers’ reliance on certain exceptions when issuer information is not available.
  • Provide exceptions to reduce unnecessary burdens on broker-dealers to quote certain OTC securities that may be less susceptible to fraud and manipulation.

The final rule was effective Dec. 28, 2020, but it has a general compliance date nine months after the effective date and a compliance date two years after the effective date for certain financial information requirements.

Staffing updates

On Dec. 10, 2020, the SEC announced that Stephanie Avakian, Division of Enforcement director, will be leaving the SEC by the end of December 2020. Avakian has led the division as co-director and then director for the past four years. The announcement said that Avakian “maintained the Division’s focus on protecting investors, addressing misconduct and market threats in a timely and effective manner, and improving the efficiency and effectiveness of the more than 1400-person Division, which has resulted in thousands of high-quality cases.” Upon Avakian’s departure, Marc P. Berger, deputy director, will serve as acting director.

On Dec. 8, 2020, the SEC announced that Robert B. Stebbins, SEC general counsel, plans to leave the SEC in early January 2021 after serving as general counsel for more than three and a half years. During his time as general counsel, Stebbins led the Office of the General Counsel, which supports an extensive range of functions including providing advice on all rulemaking, guidance, and policy matters.

On Nov. 16, 2020, the SEC announced that Jay Clayton, SEC chairman, plans to leave the SEC and end his tenure as chairman at the end of 2020. In his more than three and a half years at the SEC, Clayton focused resources on advancing the interests of Main Street investors through initiatives that promoted economic growth, investment opportunity, market integrity, and investor protection. In addition, the SEC increased the ability of businesses to raise capital in public and private markets.

On Oct. 27, 2020, the SEC announced that William Hinman, director of Corp Fin, plans to leave the SEC later this year. Since joining Corp Fin in May 2017, Hinman has led and directed a number of significant initiatives including modernizing the offering process and enhancing investor protections, improving disclosures to investors while reducing unnecessary compliance cost, providing guidance on emerging issues, and modernizing and updating the proxy process. Upon Hinman’s departure, Shelley Parratt, current deputy director of Corp Fin, will serve as the division’s acting director.