Wednesday, November 09, 2016

SEC Chief Accountant urges filers to be ready for new accounting standards

By John Filar Atwood

A number of major changes to the accounting disclosure regime are going into effect soon, and SEC Chief Accountant Wes Bricker said that the staff expects to start seeing disclosure about them this year. At Practising Law Institute’s securities regulation conference, he reminded companies that Staff Accounting Bulletin 74 requires current disclosure to preview the impact of the coming changes.

Bricker advised that under SAB74, companies are required to provide qualitative disclosure on the effect of a new standard. Even if there is no quantifiable amount to discuss, there is still a good amount of information investors should know about the new standard, he added.

Among other things, in upcoming filings companies should include the directional effects of the new standards, if they are known, and the state of implementation at the company. In addition, companies should provide an explanation of how it handling the implementation of the new standards. If a company is used to providing boilerplate disclosure, Bricker said, then it needs to refresh its controls so the appropriate content is provided.

Revenue recognition. Among the changes is a new revenue recognition standard that goes into effect in 2018 using 2017 numbers. Every company has top-line revenue that is affected by this standard, Bricker noted, and many new disclosures are required. He warned that the new standard may result in a change in timing of revenue and therefore in earnings.

PricewaterhouseCoopers managing partner Mike Gallagher said that current statistics on implementation of the revenue recognition standard are disappointing. He noted that 8 percent of public companies have not started implementation, 75 percent are in the assessment phase and 17 percent are implementing it. Companies have known about this change for a long time, he said, and the 8 percent that have not begun to make the needed changes are going to be in trouble.

Cravath Swaine & Moore partner John White indicated that anywhere there are financial metrics in a company’s disclosure, the numbers are likely to change under the new standard. Audit committees need to be aware of the changes, he said, and companies should consider whether it will change their sales practices.

Going concern. Other new accounting standards include a new leasing standard that is currently in the footnotes to the financial statements, but will be part of the balance sheet beginning in 2019. In addition, a new going concern standard shifts responsibility for making that determination. Previously the auditor issued an opinion on whether the company will be able to meet its obligations when they come due, but now management is required to make that determination.

Enhanced audit report. While not a new accounting standard, the panel discussed the enhanced audit report that the PCAOB is on the brink of approving. The proposal has been five years in the making, Bricker noted, but should be approved by the PCAOB before the end of the year. The changes would still be subject to SEC approval after that.

Gallagher pointed out that the enhanced audit report, which will require a discussion of critical accounting matters (CAMs), is already being used in Europe. They have already been through three reporting cycles with it, he noted.

He said that PwC supports the changes, including the disclosure surrounding CAMs. As it was developing the proposal, the PCAOB added a materiality standard to the CAM disclosure, which Gallagher applauded.

In his view, the adoption date of the enhanced audit report is important. If it gets approved at the end of this year, 2018 is not a practical adoption date for the changes, he believes. Companies need time to absorb the new requirements, and in his view 2019 is the soonest that it can be implemented responsibly. White noted that it will be a big change because what is now a one-quarter of a page report will become multiple pages.

Asked why Europe is so far ahead in adopting the enhanced report, Gallagher said that it is a passion project for PCAOB Chair James Doty who did not want to rush to put something in place. Doty wanted to observe how things are going in Europe to ensure that the right structure is used in the U.S., according to Gallagher.

He noted that for PwC, this applies to thousands of reports across the organization. PwC wants to be sure to deliver quality in every one of those reports, he added, so Gallagher understands why the PCAOB was being deliberate in its efforts to get the audit report right.