On December 1, 2017, the SEC’s Division of Corporation Finance updated its Financial Reporting Manual for the following changes:

  • Revising guidance related to the pro forma impact of adopting new accounting standards (Sections 3250.1(m)-(n)), including clarifying that if a registrant:
    • acquires a significant business, and such business adopts a new accounting standard as of a different date and/or under a different transition method than the registrant, than the registrant must conform the date and method of adoption of the acquired business to its own date and method in its pro forma financial information; however, the guidance suggests that the SEC Staff will consider requests for relief from this requirement; and
    • retrospectively adopts a new accounting standard on January 1, 2018, makes a significant acquisition in September 2018, and later files a Form 8-K that includes pro forma financial information for the year ended December 31, 2017 and the six months ending June 30, 2018, than the registrant does not need to apply the new accounting policy to the pro forma information for periods prior to adoption until it has reflected the new standard in the historical financial statements for those periods; however, if the registrant believes the effect of the new standard on 2017 historical information will be material, it should make appropriate disclosure to that effect in the notes to the pro forma financial information.
  • Revising guidance to address the adoption of new or revised financial accounting standards after an EGC loses its EGC status (Section 10230.1), clarifying that:
    • EGCs that take advantage of an extended transition period provision are encouraged to review their plans to adopt accounting standards upon losing EGC status and to discuss with the SEC Staff any issues they foresee in being able to timely comply; and
    • generally, if an EGC loses its status after it would have had to adopt a standard absent the extended transition, the issuer should adopt the standard in its next filing after losing status, but depending on the facts and circumstances the SEC Staff may not object to other alternatives.
  • Clarifying the effective dates for ASU No. 2014-09 “Revenue from Contracts with Customers” and ASU No. 2016-02 “New Leasing Standard” for certain public business entities (Sections 11100 and 11200).

The updates to the Financial Reporting Manual are available here.

On December 4, 2017, the SEC’s Chief Accountant, Wesley Bricker spoke at the 2017 AICPA Conference on Current SEC and PCAOB Developments.  Highlights of Mr. Bricker’s comments include the following:

  • Ongoing Priorities. Bricker identified the following priorities: (1) supporting the successful implementation of the new GAAP standards (i.e., revenue recognition, leases, and current expected credit losses); (2) conducting oversight of the FASB; (3) conducting oversight of the PCAOB; (4) consulting on accounting issues and auditor independence rules; (5) monitoring internal control over financial reporting (“ICFR”); (6) advancing the effectiveness of audit committees in financial reporting; (7) contributing to international accounting, audit, and disclosure work; and (8) identifying innovations and emerging issues and evaluating their implications for financial reporting.

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At the PLI Securities Regulation Institute, Mark Kronforst, the SEC’s Division of Corporation Finance (“Corp Fin”) Chief Accountant, reminded registrants that the SEC is willing to consider and process Rule 3-13 waiver requests.  Rule 3-13 of Regulation S-X (“Rule 3-13”) allows the SEC, upon the informal request of a registrant and where consistent with investor protection, to permit the omission of financial statements otherwise required by the SEC rules or their substitution by financial statements of a comparable character.

In July this year, SEC Chair Jay Clayton stated that under Rule 3-13, issuers can request modifications to their financial reporting requirements in certain circumstances where disclosures are burdensome to generate, but may not be material to the total mix of information available to investors. Chair Clayton encouraged companies to consider whether such modifications may be helpful in connection with their capital raising activities and assured them that SEC staff is placing a high priority on responding with timely guidance.

Echoing Mr. Clayton’s earlier remarks in July, Mr. Kronforst stated that Rule 3-13 is about facilitating capital information, and allows companies to be granted relief where consistent with investor protection.  Mr. Kronforst said the SEC staff is encouraging companies with reporting problems to come to them and that, under a pilot program, the SEC staff usually responds within five days from the date of request.  He also noted that the Corp Fin Financial Reporting Manual (the “Manual”) has been updated to include the names of particular SEC staff members who are experts within particular fields pertinent to Rule 3-13 waivers.  He said requests for relief need not be sent by certified mail or via Fedex, instead they should be submitted by email to the email address link provided in the Manual.  Finally, Mr. Kronforst reminded everyone that Rule 3-13 has two parts; just as the SEC can grant waivers, it can also ask for additional financial information that has not been provided, where necessary or appropriate and consistent with investor protection.

On November 14, 2017, SEC Chief Accountant Wesley R. Bricker gave remarks before the Financial Executives International 36th Annual Current Financial Reporting Issues Conference: Effective Financial Reporting in a Period of Change. Mr. Bricker began his speech by discussing the SEC’s focus on maintaining fair capital markets and the far reaching impact of the SEC’s reporting requirements. Highlights of the speech include the following:

  • New GAAP Standards: Mr. Bricker highlighted new GAAP standards in the area of revenue, leases and financial instruments, and he indicated that the SEC Staff is available for consultation on the new standards.
    • The new revenue standard was first released in 2014 but is now in the final stage of implementation. Mr. Bricker stressed the importance of effective internal controls during this transition period. He also suggested that applications of the new standard should be supported by proper documentation.
    • The new lease standard will be effective in 2019 for calendar-year companies and will result in assets and liabilities being recorded for most leases. Both the revenue and lease standards require reasonable judgment in certain areas and Mr. Bricker noted that while not required, a best practice is for companies to commence efforts to implement the new leases standard concurrently (or partially concurrently) with the new revenue standard.
    • Finally, with respect to the credit loss standard, FASB’s goal was to improve the usefulness of financial instrument reporting for users of financial statements. To do this, FASB developed a credit loss model that results in timelier reporting of credit losses. Bricker expressed his support for the review by U.S. prudential regulators, called upon by the U.S. Treasury, with a view towards harmonizing the application of the credit loss standard with regulators’ supervisory efforts.
  • The Auditor’s Reporting Model: Mr. Bricker next discussed the SEC’s recent approval of a new PCAOB standard which will result in substantial changes to the independent auditor’s report. He explained that these changes stem from input received over the last seven years and that the changes were unanimously approved by the SEC. One such change is that beginning with auditors of fiscal years ending on or after June 30, 2019, reports on large accelerated filers will include communication about critical audit matters. This requirement will cause the auditor to provide his or her perspective on matters that were communicated with the audit committee and involve subjective or challenging cases of judgment. Mr. Bricker encouraged auditors to update their methodologies, provide training, and, at the engagement team level, use the transition period for the implementation of the new standard to engage in dialogue with audit committees so that audit committees have time to understand the types of matters that may be communicated as critical audit matters in the audit reports. Bricker also indicated that during the phased effective dates (audit reports with communication of critical audit matters will be required for large accelerated filers 18 months before being required for all others) the SEC Staff will review carefully the results of the post-implementation procedures and work with the PCAOB as it considers whether additional changes to the requirements are needed, including to the implementation date for non-large accelerated filers.

A copy of the speech is available at: https://www.sec.gov/news/speech/speech-bricker-2017-11-14.