As part of the Center for Audit Quality’s (CAQ) ongoing effort to keep members and stakeholders informed on significant public policy and accounting matters, we are pleased to offer the Public Policy and Technical Alert (PPTA). Each month, the PPTA highlights and examines the regulatory, standard-setting, legislative, and broader financial reporting developments impacting the public company audit profession. Please note that the PPTA is intended as general information and should not be relied upon as being definitive or all-inclusive. The CAQ encourages member firms to refer to the rules, standards, guidance, and other resources in their entirety at the hyperlinks provided below. All entities should carefully evaluate which requirements apply to their respective organizations.
In This Issue
SEC Investor Advisory Committee Meeting Webcasts
The SEC posted the webcasts for its March 7 Investor Advisory Committee meeting. The committee discussed proposals to improve equity market structure and examine the use of materiality as a disclosure standard. The committee also discussed a recommendation on digital engagement practices.
SEC Adopts Rules to Enhance and Standardize Climate-Related Disclosures for Investors
The SEC adopted rules to enhance and standardize climate-related disclosures by public companies and in public offerings. Specifically, the final rules, for example, will require a registrant to disclose:
- Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition;
- The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook;
- If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities
The final rules will become effective 60 days following publication of the adopting release in the Federal Register, and compliance dates for the rules will be phased in for all registrants, with the compliance date dependent on the registrant’s filer status.
PCAOB Staff hold Virtual Roundtable on NOCLAR Proposal
The PCAOB held a virtual roundtable to discuss the NOCLAR Proposal on March 6, 2024. The roundtable included three panels focused on the proposal’s requirements relating to auditors’ identification of laws and regulations and assessment of those laws and regulations, as well as costs and benefits of the proposal. Recordings of the roundtable are available on the PCAOB website. The CAQ issued a statement following the roundtable.
SEC Accepts 2024 GAAP Financial Reporting Taxonomy and SEC Reporting Taxonomy
The FASB announced the SEC has accepted the 2024 GAAP Financial Reporting Taxonomy and the 2024 SEC Reporting Taxonomy. The FASB also finalized the 2024 DQC Rules Taxonomy. The 2024 GRT contains updates for accounting standards and other recommended improvements, including those required for SEC Release Nos. 33-11070; 34-95025 (annual reports for employee stock purchase, savings, and similar plans for Form 11-K), crypto assets, segment reporting, improvements to income tax disclosures, joint venture formations, and investments in tax credit structures. The 2024 SRT contains improvements for dimensional elements whose underlying recognition and measurement are not specified by GAAP but are commonly used by GAAP filers and for SEC schedules related to supplemental information.Jackson M. Day Named Technical Director of the Financial Accounting Standards Board
Jackson M. Day Named Technical Director of the Financial Accounting Standards Board
The Financial Accounting Standards Board appointed Jackson M. Day director of technical activities, effective in July 2024. He joins FASB from global accounting and professional services firm Ernst & Young LLP. Day also worked at the SEC between 2000 and 2003, and was a practice fellow at the FASB between 1997 and 1999. FASB chair Richard R. Jones said, “I am very pleased that Jack will join us to lead the FASB technical staff. His years of experience, his global perspective, and his collaborative leadership style will contribute positively to the work we will do in the years ahead.”
FASB Issues Standard That Clarifies Accounting Guidance Related to Profits Interest Awards
The FASB published an ASU that improves generally accepted accounting principles by adding illustrative guidance to help entities determine whether profits interest and similar awards should be accounted for as share-based payment arrangements within the scope of Topic 718, Compensation—Stock Compensation. For public business entities, the ASU is effective for annual periods beginning after December 15, 2024, and interim periods within those annual periods. Early adoption is permitted.Financial Accounting Standards Advisory Council Meeting Recap: March 5, 2024
Financial Accounting Standards Advisory Council Meeting Recap: March 5, 2024
The FASB posted a recap of the Financial Accounting Standards Advisory Council’s quarterly meeting, which was held on March 5, 2024. The FASB chair provided highlights on FASB activities, and the SEC, PCAOB, and AICPA staff members commented on current issues and activities. Council members discussed the following topics:
- Accounting Alternatives and Changes in Accounting Principles
- Disaggregation—Income Statement Expenses
- Accounting for Environmental Credit Programs
FASB Issues ASU 2024-02 Codification Improvements: Amendments to Remove References to the Concepts Statements
The FASB announced it issued ASU 2024-02—Codification Improvements—Amendments to Remove References to the Concepts Statements.
Despite Concerns About Risk, One in Four Business Executives Say Their Organizations Are Moving Ahead With Test Runs of Generative AI in Operations
The AICPA and CIMA’s first-quarter Economic Survey found that 71 percent of business executives are concerned about the potential risks of generative artificial intelligence (AI) use, but more than 25 percent have not discontinued the programs’ use in core business functions. Among the risks cited by business executives were ethical and accuracy risks and potential privacy concerns. Only 6 percent of executives were not concerned about generative AI. Companies testing the technology are doing so in sales and marketing, IT and risk management, core business operations, and finance and strategy sectors of their operations.
The IFRS Foundation Monitoring Board Reaffirmed the Importance of Ongoing Oversight of the Standard-Setting Activities and Governance of the IFRS Foundation
The Monitoring Board discussed the activities of the Trustees of the IFRS Foundation during last week’s meeting of the IFRS Foundation Monitoring Board in Madrid, Spain. The Monitoring Board continued to convey its expectations on:
- connectivity between the financial statements and sustainability-related disclosures, while ensuring mutual independence and balanced resource allocation for their standard setting process. In this context, the Monitoring Board welcomed the progress made by the IFRS Foundation, including the first joint meeting of the IASB and ISSB in January 2024;
- further exploration of effective functioning of the multi-location model to maximize the potentials of the two standard setting boards under the leadership of the Trustees of the IFRS Foundation.
- stable and diversified funding to support the work of the two SSBs.
Future Updates to Corporate Governance Code Guidance
The Financial Reporting Council announced it updated the UK Corporate Governance Code guidance, following the publication of the revised Code earlier this year. The FRC has turned it into a live document containing links to relevant publications, improving the user experience and allowing it to be reviewed on a regular basis to ensure it remains accurate and up-to-date. The FRC does not expect to make frequent changes. Starting March 6, 2024, any future updates will be made on the first Wednesday of the month.
March 2024 International Accounting Standards Board Meeting Agenda and Papers Now Available
The International Accounting Standards Board announced its March 2024 meeting agenda and papers are now available. Agenda items include:
- Power Purchase Agreements
- Post-implementation Review of IFRS 15 Revenue from Contracts with Customers
- Work Plan
- Rate-regulated Activities
- Maintenance and consistent application
- Equity Method
- Climate-related and Other Uncertainties in the Financial Statements
- Management Commentary
- Post-implementation Review of IFRS 9—Impairment
- Second Comprehensive Review of the IFRS for SMEs Accounting Standard
- Subsidiaries without Public Accountability Standard
IASB Consults on Proposals to Improve Reporting of Acquisitions
The IASB published a package of proposals aimed at enhancing the information companies provide to investors about acquisitions. The IASB is proposing amendments to IFRS 3 Business Combinations. The proposed amendments would require companies to report the objectives and related performance targets of their most important acquisitions, including whether these are met in subsequent years. Companies would also be required to provide information about the expected synergies for all material acquisitions. However, companies would not be required to disclose information that could compromise their acquisition objectives. The IASB also proposes related amendments to IAS 36 Impairment of Assets to make targeted improvements to the impairment test. The comment period for the Exposure Draft Business Combinations—Disclosures, Goodwill and Impairment is open until July 15, 2024.
IFIAR Releases 2023 Report on Annual Survey of Audit Inspection Findings
The International Forum of Independent Audit Regulators announced it released its 12th annual survey of inspection findings arising from its Member regulators’ individual inspections of audit firms affiliated with the six largest global audit firm networks.
IESBA Staff Releases a High-Level Summary of Prohibitions in the IESBA Code for Audits of Public Interest Entities
The Staff of the International Ethics Standards Board for Accountants released a high-level summary of prohibitions in the International Code of Ethics for Professional Accountants, (including International Independence Standards), especially in relation to independence for audits of public interest entities. The high-level summary is designed to highlight non-assurance services, relationships, interests, or circumstances that are prohibited for PIE audits. It will be a useful reference to stakeholders, including regulators and audit oversight bodies, audit firms and individual audit practitioners, the corporate governance community, investors, preparers, and educational bodies, or institutions. The high-level summary is not a substitute for reading the Code. Footnote references to the relevant provisions in the Code have been provided to assist further understanding of the prohibitions.
FRC Launches Market Study on UK Sustainability Assurance Market
The FRC announced the launch of its first market study to examine the UK market for sustainability assurance services. As some major audit firms are significant suppliers in this market in addition to providing statutory audits, the FRC wants to understand any potential implications for competition and resilience in the UK’s statutory audit market. Key areas the FRC’s market study will explore include:
- Choice, quality, and competition in the sustainability assurance market
- Capacity constraints and barriers to entry or expansion
- Potential impacts from changing international regulations
- Any interplay between the sustainability assurance and statutory audit markets
The FRC is inviting all interested parties to submit comments and evidence on the sustainability assurance market by June 13, 2024. The market study is expected to conclude in early 2025.
FRC Welcomes Government’s Plans to Legislate Following Non-Financial Reporting Review
The FRC welcomed the culmination of the first phase of the government’s review of non-financial reporting requirements for UK companies, which aims to simplify the reporting framework as part of its Smarter Regulation agenda. Key measures from this phase of the review include:
- Removing certain duplicative and outdated reporting requirements from the Directors’ Report to reduce overlap
- Streamlining detailed remuneration reporting requirements that were not providing useful information
- Increasing monetary thresholds for company size categories by approximately 50% to account for inflation and extend simpler reporting to more businesses
The FRC now looks forward to the government’s amendments to the legislation to achieve greater consistency and comparability in the non-financial reporting landscape, including supporting the government’s intentions to align with future international sustainability disclosure standards.
Investor Perspectives: IASB Member Zach Gast Discusses Proposed Improvements to Acquisitions Reporting
The IASB shared an Investor Perspectives article in which Zach Gast, a board member, discusses how the proposals in Exposure Draft Business Combinations—Disclosures, Goodwill and Impairment will enable investors to better assess companies’ acquisitions. The IASB is currently consulting on proposals to amend IFRS 3 Business Combinations. The proposed amendments would require companies to report the objectives and related performance targets of their most important acquisitions, including whether these are met in subsequent years. Companies would also be required to provide information about the expected synergies for all material acquisitions. The IASB also proposes related amendments to IAS 36 Impairment of Assets to make targeted improvements to the impairment test. The deadline for commenting on the Exposure Draft is July 15, 2024.
IASB Consults on Supplementary Proposals to Update the IFRS for SMEs Accounting Standard
The IASB published for public comment the Addendum to the Exposure Draft Third edition of the IFRS for SMEs Accounting Standard, which supplements the exposure draft published in September 2022. The proposals in the Exposure Draft would update the IFRS for SMEs Accounting Standard and reflect improvements made to the full IFRS Accounting Standards. The proposals balance the needs of users of SMEs’ financial statements, while maintaining the IASB’s commitment to only update the Standard periodically. The deadline for comments on the proposals in the Addendum to the Exposure Draft Third edition of the IFRS for SMEs Accounting Standard is July 31, 2024.
IASB to Issue IFRS 18 Presentation and Disclosure in Financial Statements
The IASB announced it expects to issue IFRS 18 Presentation and Disclosure in Financial Statements on April 9, 2024.
SEC Climate Rule: What Were Looking for in the Final Rule?
The CAQ responded to the SEC rule proposal, The Enhancement and Standardization of Climate-Related Disclosures for Investors, and is paying close attention to its final rule on climate change disclosures. The SEC held an open meeting on March 6 to consider whether to adopt rules to require registrants to disclose certain climate-related information. What the CAQ was looking for in the final rule was:
- What are the attestation requirements?
- What are the regulation S-X amendments?
- What is the effective date or dates for the new requirements?
- Will an alternative reporting provision be adopted that is structured to encompass reports made pursuant to the criteria developed by the International Sustainability Standards Board?
- What are the boundaries for GHG emissions disclosures?
- What framework should be used to support GHG emissions disclosures?
SEC Climate Rule Part 2: What We Were Looking for in the Final Rule Versus What We Found
After earlier exploring what the CAQ would be looking for in the SEC’s final rule on climate change disclosures, the CAQ examined what it found regarding:
- Attestation requirements
- Regulation S-X requirements
- Effective date
- Alternative reporting provision
- GHG emissions boundaries
- Framework to be used to support GHG emissions disclosures
SEC Correspondence With Corporations Regarding Climate-Related Disclosures
The CAQ shared its recent analysis of SEC correspondence with corporations regarding the climate-related disclosures in their 10-Ks. During 2023, compared with 2022, the SEC corresponded with fewer companies and focused on a subset of the questions noted in their sample letter to companies regarding climate change disclosures. Of the almost 20 companies analyzed, a few takeaways identified in the review of climate-related quantitative disclosures are:
- When a company described costs associated with physical climate-related risks they were typically costs incurred due to property damage from severe weather events like hurricanes.
- Roughly 60% of the companies indicated that they purchased renewable energy credits, or carbon credits/offsets of various amounts during the reporting period, all deemed immaterial for reporting purposes.
Companies noted that they would continue to evaluate these matters in future periods and consider the need for additional disclosure should amounts and risks become more material to their financial statements.
Audit Committees Prioritize Cybersecurity, Enterprise Risk Management in New Survey
The CAQ announced the findings of the “Audit Committee Practices Report: Common Threads Across Audit Committees,” which was a joint effort between Deloitte’s Center for Board Effectiveness and CAQ. Audit committee members identified cybersecurity as the top priority in the next 12 months followed by enterprise risk management, finance and internal audit talent (a new entry in this year’s survey), compliance with laws and regulations, and finance transformation. Meanwhile, trending topics like artificial intelligence governance and environmental, social, and governance reporting are receiving comparably less attention. With a growing agenda and evolving responsibilities, audit committees see opportunities to increase effectiveness. Respondents highlighted three key areas for improvement:
- Increased discussion and/or engagement from members during meetings — highlighted by 29% of respondents.
- Improved quality of pre-read materials — highlighted by 28% of respondents.
- Improved quality of presentations during meetings — highlighted by 26% of respondents.
Comment Letter Analysis: CAQ Analysis of IAASB Going Concern Comment Letters
The CAQ posted an analysis of comment letters the IAASB received in response to Exposure Draft, proposed International Standard on Auditing 570 (Revised 202X), Going Concern. Key themes from the analysis are:
- There is a need for enhanced coordination with the IASB.
- There is support for enhanced focus on risk assessment and mixed views on scalability.
- There is support to explore enhanced transparency but mixed views on the proposed “Going Concern” section in the auditor’s report.
Three takeaways from the feedback the IAASB received in response to their proposal:
- Increased transparency to financial statement users about going concern considerations cannot be solved with an auditing standard alone.
- Linking the design and performance of audit procedures to the auditor’s risk assessment will enable the auditor to use professional judgment when determining and executing their audit response.
- Facilitating a robust dialogue between auditors and investors to understand what investors are expecting and how changes to the auditing standards could enable auditors to meet those expectations could help the IAASB and PCAOB in finalizing their proposal.
Summary of the Enhancement and Standardization of Climate-Related Disclosures for Investors
The CAQ posted a publication that provides a high-level summary of The Enhancement and Standardization of Climate-Related Disclosures for Investors, the rule that the SEC adopted on March 6, 2024. The final rule requires a registrant to disclose certain climate-related information in its registration statements and annual report. The publication offers insight into:
- Changes from the proposed rule
- Content of the disclosures
- Presentation and attestation of the disclosures
- Phase-in periods and accommodations and
- Compliance dates under the final rule
PCAOB: AS 2405, A Company’s Noncompliance With Laws and Regulations
The CAQ submitted a comment letter written in response to the PCAOB’s reopening of the comment period on its proposed Amendments to PCAOB Auditing Standards related to a Company’s Noncompliance with Laws and Regulations and Other Related Amendments and related roundtable briefing paper. This comment letter is a supplement to the letter the CAQ submitted on August 7, 2023. The CAQ continues to echo the comments and concerns raised in that comment letter. In the latest letter the CAQ provides the following:
- Data the CAQ has compiled and analysis the CAQ has completed subsequent to the August 7, 2023, comment letter;
- Alternatives to the proposed requirements that should form the basis for further outreach and consultation by the PCAOB; and
- Observations from the March 6, 2024 virtual roundtable
The Center for Audit Quality is a nonpartisan public policy organization serving as the voice of U.S. public company auditors and matters related to audits of public companies. The CAQ promotes high quality performance by U.S. public company auditors; convenes capital market stakeholders to advance the discussion of critical issues affecting audit quality, U.S. public company reporting, and investor trust in the capital markets; and using independent research and analyses, champions policies and standards that bolster and support the effectiveness and responsiveness of U.S. public company auditors and audits to dynamic market conditions. Based in Washington, DC, the CAQ is affiliated with the American Institute of CPAs. For more information, visit www.thecaq.org.
The CAQ Public Policy and Technical Alert (PPTA) is intended as general information and should not be relied upon as being definitive or all-inclusive. As with all other CAQ resources, this is not authoritative and readers are urged to refer to relevant rules and standards. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The CAQ makes no representations, warranties, or guarantees about, and assumes no responsibility for, the content or application of the material contained herein and expressly disclaims all liability for any damages arising out of the use of, reference to, or reliance on such material. This publication does not represent an official position of the CAQ, its board, or its members.
Questions and comments about the Public Policy & Technical Alert can be addressed to Vanessa Teitelbaum, Senior Director, Professional Practice (vteitelbaum@thecaq.org).