Companies that face setbacks implementing FASB’s standards will be expected to disclose delays to investors

The SEC is expecting companies that hit problems implementing the FASB’s standards for revenue recognition, lease contracts, and losses on bad loans and financial instruments to reveal the setbacks to their shareholders.

The market regulator’s officials have advised companies to rely on guidance such as 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 changes to U.S. GAAP. SAB No. 74 requires companies to disclose in their financial statement footnotes their expectations for how new accounting standards will affect their financial results.

According to Sagar Teotia, a deputy chief accountant with the SEC, the agency’s staff is paying close attention to companies that fall behind with their implementation, with the hope that public disclosure will give shareholders, auditors, and directors, including those who sit on audit committees, an opportunity to hold management accountable for the delay.

“We expect companies to be transparent in their disclosure as to where the company is in its implementation progress,” Teotia said during a Sept. 21, 2017, speech to the San Diego chapter of the Financial Executives Institute. “The SAB 74 disclosures are intended to inform a reader where the company is in its implementation progress. As the effective date nears, and for companies that have not made sufficient progress, this fact will become clear in the SAB 74 disclosures.”

Teotia’s emphasis on the guidance in SAB No. 74 echoes points that Chief Accountant Wesley Bricker has made in his public statements.

The SEC is particularly concerned that the cumulative effect of adopting a succession of major standards will so tax companies and their financial reporting staffs that they will not be able to properly address all the requirements.

“Sequential implementation of the revenue recognition standard followed by the leases standard may leave a company in a situation where it finds that it has potentially limited its time to adopt the new leases standard and has limited its time to formulate reasonable judgments and assess potential changes needed in” its internal controls over financial reporting, Teotia said. He added that some of the work done for implementing the revenue standard in Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers (Topic 606), may be useful with the guidance from ASU No. 2016-02, Leases (Topic 842). Companies that have ensured that they have the staff who are qualified to evaluate the guidance in Topic 606 will be better situated for implementing Topic 842.

Public companies have to begin applying the revenue standard in 2018 and the lease standard in 2019.

For the credit loss standard in ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which public companies will have to adopt in 2020, the SEC officials hope that by monitoring the progress of the implementation they will be able to resolve problems in time for the standard’s effective date, Teotia said.

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