Chief accountant wants disclosures about adopting GAAP updates to address investor needs

SEC Chief Accountant Wesley Bricker said the market regulator’s staff will push public companies to go into detail about their transition to the FASB’s recently adopted standards and keep investors informed about the effect the standards will have.

Bricker, who spoke at Financial Executives International’s Current Financial Reporting Issues conference in New York on Nov. 15, 2016, was elaborating on a statement in September issued by one of his deputies to the FASB’s Emerging Issues Task Force (EITF). The SEC told the EITF that it expects public companies to adhere to Staff Accounting Bulletin (SAB) No. 74, Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Period, (SAB Topic 11.M), on their adoption of the FASB’s revenue recognition, leases, and credit loss standards. SAB No. 74 requires companies to disclose in their financial statement footnotes their expectations for how new accounting standards will affect their financial results. He also added some detail to statements about the implementation of the revenue standard he made earlier in the month at the Practising Law Institute’s Securities Regulation Institute.

The announcement to the EITF was made in regard to the SEC’s evaluation of the implementation of Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers (Topic 606), which goes into effect in 2018 for U.S. public companies, ASU No. 2016-02, Leases (Topic 842), which becomes effective in 2019, and ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument, which public companies will have to adopt in 2020.

A FASB spokesperson said the accounting board is preparing an update to U.S. GAAP based upon the statement the SEC made to the EITF in September. According to the statement, companies that are unable to estimate the effect a new accounting standard will have on their financial statement, should in their application of SAB Topic 11.M “consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. In this regard, the SEC staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies that the registrant expects to apply, if determined, and a comparison to the registrant’s current accounting policies. Also, a registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed.”

“In the event that your disclosure has traditionally read, as many of them have, that ‘management is evaluating, and we don’t yet know the anticipated effect,’ essentially what the staff announcement said was that was not enough,” Bricker told the FEI attendees. “You really need to push further and provide qualitative information about the status of your work in developing the anticipated financial effect. That might mean providing directional information about the anticipated effect, even if you haven’t measured the precise amount. That might also include information about the status of your work, and any anticipated accounting policy decisions that you’re making. It’s all in the context of identifying for investors the kinds of information that they will learn about whenever the new standard has been applied.”

Bricker added that public companies should adhere to the SAB Topic 11.M requirements as they prepare their year-end financial statements. He also said the disclosure rules should factor into how managements discuss the transition to the new standards with their boards’ audit committees. The SEC is expecting audit committee members to press managements about the transition to the new standards.

“Audit committees should anticipate a good dialogue with management about the status of their implementation,” Bricker said. “Audit committees should also anticipate good dialogue with the auditors about the auditor’s view of the status of the implementation.”

Bricker said audit committee members need to determine whether their companies are behind in their implementation work, what they will need to do to get caught up, and whether management is taking any delays seriously enough.

SEC staffers have been making many of the points Bricker brought up in some of the one-on-one discussions they have had with public companies that have sought information from the agency about their implementation. Bricker said the SEC is trying to ensure that the feedback it gives allows for flexibility among public companies.

“We’re not forcing uniformity where the standard-setters haven’t standardized on an outcome,” Bricker said. “However we do look for fairly rigorous analysis of the issues.”

For in-depth analysis of the FASB’s revenue recognition standard, please see Catalyst: U.S. GAAP — Revenue Recognition, also on Checkpoint. An analysis of the FASB’s standard for lease accounting can be found at Catalyst: U.S. GAAP — Leases.

Additional analysis of the revenue standard can be found on Checkpoint in Accounting and Auditing Update Service [AAUS No. 2014-18] and the SEC Accounting and Reporting Update Service [SARU No. 2014-21] (June 2014): Special Report: Comprehensive Coverage of the New U.S. GAAP Revenue Recognition Requirements. Additional analysis of the lease standard can be found at AAUS No. 2016-15 and SARU No. 2016-13 (March 2016): Special Report: Accounting for Leases—An Explanation and Analysis of Accounting Standards Update No. 2016-02. An analysis of the credit loss standard can be found at AAUS No. 2016-29 and SARU No. 2016-34 (July 2016): Special Report: Accounting for Credit Losses on Certain Financial Assets—An Explanation and Analysis of Accounting Standards Update No. 2016-13.

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