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
The Statement of Cash Flows: Improving the Quality of Cash Flow Information Provided to Investors
The SEC posted a statement by SEC Chief Accountant Paul Munter on the statement of cash flows. Munter addresses the importance of cash flow reporting for investors, provides key reminders of professional responsibilities around the statement of cash flows, and discusses improving cash flow information for investors.
Fall 2023 Regulatory Agenda Update
The SEC released the Fall 2023 Unified Agenda of Regulatory and Deregulatory Actions by the U.S. Office of Information and Regulatory Affairs (commonly referred to as the Reg Flex Agenda). The Fall 2023 Unified Agenda of Regulatory and Deregulatory Actions includes contributions related to the SEC and short- and long-term regulatory actions that administrative agencies plan to take. The Climate Change Disclosure Rule Final Action is listed as April 2024.
SEC Division of Corporation Finance Updates CD&Is
The SEC’s Division of Corporation Finance updated the following Compliance and Disclosure Interpretations: Exchange Act Form 8-K. Section 104B. Item 1.05 Material Cybersecurity Incidents.
- Question 104B.01
- Question 104B.02
- Question 104B.03
- Question 104B.04
Cybersecurity Disclosure
The SEC posted a statement on Cybersecurity Disclosure by Erik Gerding, Director, Division of Corporation Finance. In July of this year, the Commission adopted final rules that will require public companies to disclose both material cybersecurity incidents they experience and, on an annual basis, material information regarding their cybersecurity risk management, strategy, and governance. Because some of the new disclosure requirements will take effect later this month, Gerding said it was important to underscore the changes the Commission made from the March 2022 proposal, highlight some significant parts of the rationale and mechanics of these rules, and clear up potential misconceptions.
PCAOB Staff Outline 2024 Inspection Priorities With Focus on Driving Improvements in Audit Quality
PCAOB inspectors outlined their priorities for 2024 inspections in a PCAOB staff report. The report highlights key risks, like high interest rates, and other considerations, like audit areas with recurring deficiencies, that auditors should be focused on when planning and performing audit procedures. It notes that the PCAOB will continue to prioritize inspections of financial-services sector audits, digital assets, and more. The report also includes suggested questions for audit committees to hold firms accountable to high standards when hiring and overseeing the audit process. The report also reiterates the inspection staff’s commitment to enhancements to its inspection program, such as increasing the number of engagements reviewed and improving the timeliness of inspection reports.
A New Staff Report Provides Observations From the PCAOB’s Target Team, a Group of Inspectors Who Focus on Emerging Audit Risks and Other Topics
The PCAOB posted a new report, Spotlight: Observations From the Target Team’s 2022 Inspections. This Spotlight provides auditors and other stakeholders with a view into the target team’s work in 2022, including observations (that include deficiencies that resulted in the issuance of comment forms), good practices, and key insights.
Financial Accounting Foundation Appoints Eleven New Members to the Financial Accounting Standards Advisory Council
The Board of Trustees of the Financial Accounting Foundation announced the appointment of 11 new members to the Financial Accounting Standards Advisory Council. The FASAC advises the FASB on strategic and technical issues, project priorities, and other matters that affect standard setting. The FASAC provides the FASB with diverse perspectives from individuals with varied business and professional backgrounds. The new FASAC members will serve a one-year term that begins on January 1, 2024, and may be reappointed for additional terms.
FASB Issues Standard to Improve the Accounting for and Disclosure of Certain Crypto Assets
The FASB published an ASU intended to improve the accounting for and disclosure of certain crypto assets. The amendments in the ASU improve the accounting for certain crypto assets by requiring an entity to measure those crypto assets at fair value each reporting period with changes in fair value recognized in net income. The amendments also improve the information provided to investors about an entity’s crypto asset holdings by requiring disclosure about significant holdings, contractual sale restrictions, and changes during the reporting period. The amendments in the ASU are effective for all entities for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years.
FASB Issues Standard That Enhances Income Tax Disclosures
The FASB issued an ASU that addresses requests for improved income tax disclosures from investors, lenders, creditors, and other allocators of capital that use the financial statements to make capital allocation decisions. The ASU improves the transparency of income tax disclosures by requiring:
- Consistent categories and greater disaggregation of information in the rate reconciliation and
- Income taxes paid disaggregated by jurisdiction.
It also includes certain other amendments to improve the effectiveness of income tax disclosures. For public business entities, the standard is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance.
2024 GAAP Financial Reporting Taxonomy, SEC Reporting Taxonomy, and DQC Rules Taxonomy Now Available
The FASB announced the availability of the 2024 GAAP Financial Reporting Taxonomy and the 2024 SEC Reporting Taxonomy. The FASB also announced the availability of the 2024 DQC Rules Taxonomy.
FASB Seeks Public Comment on Proposed Improvements to Accounting Guidance on Induced Conversions of Convertible Debt Instruments
The FASB published a proposed ASU intended to improve the application and relevance of accounting guidance related to induced conversions of convertible debt instruments. When the terms of a convertible debt instrument are changed to induce conversion of the instrument, Subtopic 470-20, Debt—Debt with Conversion and Other Options, sets forth guidance for determining whether the transaction should be accounted for as an induced conversion (as opposed to a debt extinguishment). The proposed ASU would clarify the requirements for determining whether certain settlements of convertible debt instruments, including convertible debt instruments with cash conversion features, should be accounted for as induced conversions. Stakeholders are encouraged to review and provide input on the proposed ASU by March 18, 2024.
FASB Seeks Input on Proposed New Chapter of Its Conceptual Framework: Measurement
The FASB issued a proposed new chapter of its Conceptual Framework related to the measurement of items recognized in financial statements. If finalized by the Board, the proposed chapter would become Chapter 6 of FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting, and would represent the completion of the FASB’s Conceptual Framework. The proposed chapter provides concepts for the Board to consider when choosing a measurement system for an asset or a liability recognized in general purpose financial statements. It describes:
- Two relevant and representationally faithful measurement systems: the entry price system and the exit price system and
- Considerations when selecting a measurement system.
Stakeholders are encouraged to review and provide comment on the proposed chapter by March 20, 2024.
AICPA Debuts Proposed Reporting Framework for Issuers of Stablecoins
The AICPA announced it has developed a comprehensive set of criteria to help increase transparency around stablecoins, a type of digital asset backed by traditional currency or other types of assets. The document will provide the first framework of its kind to those issuing stablecoins, backed by fiat currency, to report relevant information to stakeholders and will provide the basis for attestation services around this asset class. The AICPA welcomes comments on this exposure draft for stablecoin criteria, with the comment period ending January 29, 2024.
AICPA Continues Advocacy on Digital Assets With Recent Comments on Proposed Regulations for Broker Reporting Rules for Digital Asset Transactions
The AICPA announced it submitted comment letters and recommendations on proposed regulations for section 6045 regarding gross proceeds and basis reporting by brokers and the determination of amount realized and basis for digital asset transactions. The latest recommendations, made by AICPA’s Virtual Currency and Digital Assets Tax Task Force, address the following areas:
- Basis tracking issues
- Cost basis in determination of gain or loss and broker notification
- Duplicate reporting
- Penalty relief
- Taxpayer privacy and need for a de minimis rule
- Request for comments #44
- Need for delay in effective date of Infrastructure Investment Jobs Act changes to section 6050I
The AICPA recommends the IRS and Treasury provide guidance on how taxpayers will comply with specific identification of digital assets when cryptocurrency tracking software generally provides neither a way to mark those digital assets nor incorporate those sales into gain and loss calculations.
NASBA and AICPA Approve Revisions to Continuing Professional Education Standards
The National Association of State Boards of Accountancy (NASBA) and the AICPA approved revisions to the Statement on Standards for Continuing Professional Education Programs (Standards), as well as the NASBA Fields of Study document. The Standards changes, which include additional options for virtual learning, are effective Jan. 1, 2024. The revisions to the Fields of Study document include the addition of more current, relevant topics under the established fields of study classifications.
IFIAR Statement on Sustainability Assurance Oversight
The International Forum of Independent Audit Regulators has published its Statement on Sustainability Assurance Oversight. As a result of investor and other stakeholder demands, and in some jurisdictions pursuant to government mandates, the disclosure of sustainability related information is increasing around the world. High quality assurance over sustainability information will play an important role in ensuring reported sustainability information is reliable and decision useful. Accordingly, IFIAR supports the on-going work of international audit-related standard setters to develop high quality assurance and ethics (including independence) standards over sustainability-related information on an expedited timeline. This should allow for users, issuers, assurance providers and audit regulators to familiarize themselves with the content ahead of the end-2024 reporting period, when the International Sustainability Standards Board’s S1 and S2 become effective and the Corporate Sustainability Reporting Directive becomes applicable in the European Union. Read the full statement here.
New Standard for Audits of Less Complex Entities Issued by IAASB
The International Auditing and Assurance Standards Board published the International Standard on Auditing for Audits of Financial Statements of Less Complex Entities, known as the ISA for LCE. The ISA for LCE is a standalone global auditing standard designed specifically for smaller and less complex businesses and organizations. Built on the foundation of the International Standards on Auditing, audits performed using this standard provide the same level of assurance for eligible audits: reasonable assurance. The standard is effective for audits beginning on or after December 15, 2025, for jurisdictions that adopt or permit its use. Released alongside the ISA for LCE are a Basis for Conclusions, which details feedback from the public consultation period, a high-level fact sheet, and a frequently asked questions document.
FRC Announces Areas of Supervisory Focus for 2024/25
The FRC announced its areas of supervisory focus for 2024/25, including priority sectors, for corporate reporting reviews and audit quality inspections. The priority sectors for selection of company accounts and audits are:
- Construction and Materials
- Food Producers
- Gas, Water & Multi-utilities
- Industrial Metals and Mining
- Retail
The FRC’s program of corporate reporting reviews and audit quality inspections will pay particular attention to the following areas:
- Risks related to the current economic environment (for example: going concern, impairment, recoverability and recognition of tax assets/liabilities)
- Climate related risks, including TCFD disclosures
- Implementation of IFRS 17 – Insurance Contracts
- Cash flow statements
FRC Lab Insights: Structured Digital Reporting 2023
The FRC Lab published its latest insight report setting out some areas of focus for companies and suggestions to optimize reporting to meet the needs of investors and other users. The report is based on a review of 50 reports filed to the U.K. Financial Conduct Authority’s National Storage Mechanism in this second year of mandatory reporting. The Lab worked on this review together with the FCA’s Primary Market Oversight and Listing Transactions Departments within the Market Oversight Directorate.
IAASB Issues Guidance for Assurance Practitioners When Citing IFRS Accounting Standards
The IAASB issued guidance to help stakeholders understand how to reference IFRS Accounting Standards to follow recent updates to the IFRS Foundation Trade Mark Guidelines. The updated IFRS Foundation guidelines require, among other things, that International Accounting Standards Board standards, including the International Accounting Standards and International Financial Reporting Standards, be referred to as “IFRS Accounting Standards.” The IAASB’s new guidance clarifies how auditors or practitioners should refer to the IFRS Accounting Standards in their reports. The alert also describes changes that the IAASB intends to make to future editions of the IAASB handbook to address existing references to the IASs and IFRSs.
FRC Publishes Inspection Findings for the Tier 2 and 3 Audit Firms
The FRC published its annual inspection findings for Tier 2 and Tier 3 audit firms, alongside the actions these firms must prioritize to deliver high quality audit and contribute to a more resilient audit market. Only 38% of audits reviewed required no more than limited improvements, 24% required more than limited improvements, and a further 38% required significant improvements. While these results represent only a small risk-based sample, the number of audits requiring significant improvement is unacceptable. The FRC continues to identify deficiencies in the audit of judgements and estimates, and going concern, both of which require audit teams to demonstrate robust professional skepticism.
PIOB Opens Global Invitation for Application for IAASB 2025 Board Vacancies
The Public Interest Oversight Board’s Standard-Setting Boards Nominations Committee opened the Invitation for Application for upcoming vacancies on the IAASB for terms beginning January 1, 2025. The application period is open until February 9, 2024.
PIOB Opens Global Search to Fill IESBA 2025 Board Vacancies
The Public Interest Oversight Board’s Standard-Setting Boards Nominations Committee opened the Invitation for Application for upcoming vacancies on the International Ethics Standards Board for Accountants for terms beginning January 1, 2025. The application period is open until February 9, 2024.
New and Updated Resources to Help Companies Apply IFRS S1 and IFRS S2 From 2024
The International Accounting Standards Board announced the International Sustainability Standards Board is providing new and updated resources to help companies apply the ISSB Standards—IFRS S1 and IFRS S2—coming into effect in January 2024. This includes enhancements to the SASB Standards, and the publication of educational material to help companies apply the climate standard, IFRS S2. The ISSB is also focused on advancing work to develop the IFRS Sustainability Disclosure Taxonomy to enable the digital consumption of information when the ISSB Standards are applied.
FRC Publishes Annual Review of Competition in the Audit Market
The FRC published an updated overview of competition in the UK’s audit market for public interest entities. While the report shows a small increase in market share for challenger audit firms, the audit market remains highly concentrated. The Big Four accounting firms continue to dominate, earning 98% of FTSE 350 audit fees in 2022, resulting in limited choices for businesses and ongoing concerns about resilience. Looking ahead, the report highlights the FRC’s intention to conduct market studies that can generate proposals to improve the way the market functions with particular regard to better choice and resilience. This will allow the FRC to explore issues relating to the audit market in more detail, generating more granular information about areas of concern and suggested actions to address them.
IOSCO Statement on Online Harm
IOSCO posted a statement intended to serve as a warning to retail investors about the serious perils of online harm. The ease of online misconduct and the borderless nature of the online environment present new and growing challenges as novel forms of crypto-asset or technology-based fraud are increasing. The growing sophistication in the application of artificial intelligence to all facets of society has the dual potential of magnifying the scale and impact of harmful online activities and providing new and powerful ways for regulators to detect, deter, and disrupt such activities.
IOSCO Publishes Its Recommendations on Accounting for Goodwill
The Board of the International Organization of Securities Commissions published its report “Recommendations on Accounting for Goodwill” for issuers, audit committees (or those charged with governance), and external auditors aimed at enhancing the reliability, faithful representation and transparency of goodwill recorded and disclosed in the financial statements. IOSCO believes that the recommendations contained within the report will also be useful to standard setters, including the International Accounting Standards Board, as they pursue initiatives to enhance business combination disclosures and related matters of goodwill impairment testing.
IESBA Announces Successful Completion and Approvals of Sustainability Exposure Draft and Tax Planning-Related Ethics Standard
The International Ethics Standards Board for Accountants announced it successfully completed and approved an Exposure Draft on Ethics and Independence Standards for Sustainability Reporting and Assurance and the final Ethics Standard for Tax Planning and Related Services. The IESBA voted and approved the proposed new International Ethics Standards for Sustainability Assurance (including International Independence Standards), and proposed revisions to the International Code of Ethics for Professional Accountants on sustainability reporting. The Exposure Draft will contain proposed independence standards for use by all sustainability assurance practitioners regardless of whether they are professional accountants, and specific ethics provisions relevant to sustainability reporting and assurance. Other major achievements of the IESBA December Board meeting include the approval of an Exposure Draft on the Use of Experts and of the IESBA’s Strategy and Work Plan for 2024-2027.
CAQ Releases 2023 Audit Partner Pulse Survey
The CAQ released its Fall 2023 Audit Partner Pulse Survey. The biannual survey asked audit partners about their perspectives on the current business environment in the U.S. as well as on emerging opportunities and risks, including the accounting talent shortage, cybersecurity, and artificial intelligence. Some of the highlights of the report include:
- Pessimism in the economy has dropped by 30 percentage points since the Fall of 2022.
- Nearly 1 in 3 public companies are using A.I. in their financial reporting.
- A clear majority of public companies (59%) are using technology – including A.I. and machine learning – to manage risk, fraud, and cybersecurity threats.
- 3 in 4 audit partners believe regulations are having a negative impact on businesses.
- Auditors see nearly two-thirds of companies preparing for new global and U.S. climate reporting requirements.
- The number of companies seeing cybersecurity as a large economic risk jumped 20 percentage points since the Fall of 2022.
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).