PUBLIC POLICY AND TECHNICAL ALERT, NOVEMBER 2019
Friday, December 6, 2019
As part of the Center for Audit Quality’s 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:
- PCAOB approves 2020 budget, reaffirms five-year strategic plan
- SEC staff issues SAB on new credit losses standard
- SEC advisory committee examines ESG disclosures
- SEC proposes rule amendments
- SEC Division of Enforcement publishes annual report for FY 2019
- FASB issues new and proposed ASUs
- FASB ratifies EITF consensus on clarifying the interaction among Topics 321, 323, and 815
- FASB approves finalization of guidance to assist in transition away from Interbank Offered Rates to new reference rates
- FRC issues Developments in Audit report
- IAASB announces new board member appointments
- IFAC Council approves new board members
- AICPA proposes updates to audit and accounting guide for the gaming industry
- ASB proposes three-year plan
- Grant Thornton names Bradley J Preber as CEO
- CAQ publishes 2019 Audit Committee Transparency Barometer
- Profession in Focus: Audit Committee Transparency
- CAQ issues RFP for academic research in auditing
- CAQ comments on the SEC’s Proposed Rule, Update of Statistical Disclosures for Bank and Savings and Loan Registrants
PCAOB approves 2020 budget, reaffirms five-year strategic plan
The PCAOB approved its fiscal year 2020 budget and five-year strategic plan in an open meeting. The 2020 budget includes investments in personnel, processes, and technology, and will provide the Board with the resources necessary to continue to make progress toward implementing its strategic plan. The budget is $284.7 million, which would fund 850 positions.
The PCAOB’s budget is subject to approval by the SEC, which is scheduled to meet on December 18 to consider it.
SEC staff issues SAB on new credit losses standard
The SEC staff published Staff Accounting Bulletin (SAB) No. 119 to align the staff’s guidance with FASB Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses. The SAB discusses the documentation the staff would normally expect registrants engaged in lending transactions to prepare and maintain to support estimates of expected credit losses for loan transactions.
SEC advisory committee examines ESG disclosures
The SEC’s Investor Advisory Committee met on November 7. In the morning session, there was a panel discussion on whether investors use environmental, social, and governance (ESG) data in investment/capital allocation decisions.
SEC proposes new rule amendments
The SEC proposed new rules and amendments to:
- rules that exempt business furnishing proxy voting advice from the filing and information requirements of the federal proxy rules. The proposal is intended to help ensure that proxy voting advice used by investors and others who vote on investors’ behalf is accurate, transparent, and materially complete.
- modernize Exchange Act Rule 14a-8, the shareholder proposal rule, which requires companies subject to the federal proxy rules to include shareholder proposals in their proxy statements, subject to certain procedural and substantive requirements. The proposed rule permits a company to exclude a shareholder proposal from its proxy statement if the proposal fails to meet any of several specified substantive or procedural requirements, or if the shareholder-proponent does not satisfy certain eligibility or procedural requirements.
- provide an updated, comprehensive approach to the regulation of funds’ use of derivatives and certain other transactions. Proposed new rule 18f-4, an exemptive rule under the Investment Company Act of 1940 (the Act), would permit mutual funds, exchange-traded funds (ETFs), registered closed-end funds, and business development companies to enter into derivatives transactions and certain other transactions notwithstanding the restrictions under section 18 of the Act.
- address specific considerations raised by certain leveraged or inverse funds and exchange-listed commodity or currency pools. Proposed new rule 15l-2 under the Securities Exchange Act of 1934 and rule 211(h)-1 under the Investment Advisers Act of 1940 would require a broker, dealer, or registered investment adviser to exercise due diligence in approving a retail customer’s or client’s account to buy or sell shares of certain “leveraged/inverse investment vehicles.” In connection with these proposed new rules, the SEC proposed to amend rule 6c-11 under the Investment Company Act to allow certain leveraged or inverse ETFs to operate without obtaining an exemptive order.
The deadline for submitting comments for the proposed rules and amendments will be 60 days following publication in the Federal Register.
SEC Division of Enforcement publishes annual report for FY 2019
The SEC’s Division of Enforcement issued its annual report for fiscal year 2019. The report details the Division’s efforts and initiatives on behalf of investors, highlights several significant actions, and presents the activities of the division from both a qualitative and quantitative perspective.
FASB issues new and proposed ASUs
The FASB issued four new Accounting Standard Updates (ASU) in November:
- ASU 2019-08, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements – Share-Based Consideration Payable to a Customer. This ASU will affect companies that issue share-based payments (for example, options or warrants) to their customers. Similar to issuing a cash rebate to a customer, issuing a share-based payment to a customer can incentivize additional purchases. The share-based payments also can serve a strategic purpose by aligning the interests of a supplier and its customer, because the customer’s additional purchases increase its investment in the supplier.
- ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, finalizes various effective date delays for private companies, not-for-profit organizations, and certain smaller reporting companies applying the credit losses, leases, and hedging standards.
- ASU 2019-09, Financial Services – Insurance (Topic 944): Effective Date, finalizes insurance standard effective date delays for all insurance companies that issue long-duration contracts, such as life insurance and annuities.
- ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. The ASU addresses issues raised by stakeholders during the implementation of ASU 2016-13. Among other narrow-scope improvements, the new ASU clarifies guidance around how to report expected recoveries. “Expected recoveries” describes a situation in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset but then later determines that the amount written off, or a portion of that amount, will in fact be recovered. While applying the credit losses standard, stakeholders questioned whether expected recoveries were permitted on assets that had already shown credit deterioration at the time of purchase.
The FASB also issued two proposed ASUs:
- Proposed ASU, Derivatives and Hedging (Topic 815): Codification Improvements to Hedge Accounting. The proposed ASU primarily addresses the change in hedged risk in a cash flow hedge. The previous guidance allowed the risk causing variability in cash flows of the forecasted transaction to change (for example, from one variable interest rate to another variable interest rate or from one commodity index to a different index for the same commodity) if certain criteria were met. The proposed ASU would clarify whether that change can happen both prospectively (that is, before the forecasted transaction occurs) and retrospectively (that is, after the forecasted transaction occurs) and, if so, how hedge accounting guidance should be applied in those instances.
The deadline for submitting comments is January 13, 2020.
- In Section A, the FASB proposes amendments to the Accounting Standard Codification (ASC or Codification) that would remove references to various Concepts Statements. In most instances, the references are extraneous and not required to understand or apply the guidance. In other instances, the references are a substitute for actual wording from a Concepts Statement, specifically the definitions of some elements from FASB Concepts Statement No. 6, Elements of Financial Statements.
- Section B contains proposed amendments that would improve the consistency of the Codification by including all disclosure guidance in the appropriate Disclosure Section.
- Section C contains proposed Codification improvements that vary in nature.
The deadline for submitting comments is December 26, 2019.
FASB ratifies EITF consensus on clarifying the interaction among Topics 321, 323, and 815
The FASB ratified the Emerging Issues Task Force (EITF) consensus, Issue No. 19-A, “Financial Instruments – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815,” and directed the staff to draft an ASU reflecting the consensus for vote by written ballot.
Under Issue No. 19-A:
- An entity should consider observable transactions that would require an investor to either apply or discontinue the equity method of accounting for purposes of applying the measurement alternative under ASC Topic 321, Investments – Equity Securities, immediately before applying or upon discontinuing the equity method.
- For the purpose of applying paragraph ASC 815-10-15-141(a), an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method or the fair value option in accordance with ASC Topic 825, Financial Instruments.
- An entity is required to apply the amendments in the final ASU prospectively and to disclose the nature of and reasons for the change in accounting principle, the transition method, and a qualitative description of the financial statement line items affected by the change.
FASB approves finalization of guidance to assist in transition away from Interbank Offered Rates to new reference rates
The FASB approved an ASU to provide temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The FASB is expected to issue a final ASU in early 2020.
The guidance will apply only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform.
The final ASU is intended to assist stakeholders during the global market-wide reference rate transition period. Therefore, the guidance would be in effect for a limited time. That is, the guidance would be effective upon issuance of final guidance and would not apply to contract modifications made and hedging relationships entered or evaluated after December 31, 2022.
FRC issues Developments in Audit report
The UK Financial Reporting Council (FRC) released its Developments in Audit Report for 2019. The overview report focused on assessing justifiable confidence in UK audits and also summarizes the current “state of play” as seen by the FRC and its stakeholders. It is supplemented by a more detailed report of the FRC’s audit related activities and evidence gathering.
IAASB announces new board member appointments
The IAASB announced the following new appointments and re-appointments:
- Sue Almond, United Kingdom
- Julie Corden, Canada
- Josephine Jackson, United Kingdom
- Len Jui, China
- Lyn Provost, New Zealand
Re-appointed as Deputy Chair:
- Fiona Campbell, Australia
IFAC Council approves new board members
On November 20, the IFAC Council announced the approval of eight Board members, including five women.
New IFAC Board members and their nominating member organizations are:
- Yeong Kyun Ahn, Korean Institute of Certified Public Accountants
- Joan Curry, Chartered Accountants Ireland
- Caroline Gardner, Chartered Institute of Public Finance and Accountancy
- Winnie Nyamute, Institute of Certified Public Accountants of Kenya
- Fiona Wilkinson, Consultative Committee of Accountancy Bodies
- Ismaila Zakari, Institute of Chartered Accountants of Nigeria
Returning members re-appointed for a second term of service to IFAC’s Board are:
- Tommye Barie, Association of International Certified Professional Accountants
- Idésio da Silva Coelho, Jr., Instituto dos Auditores Independentes do Brasil and Conselho Federal de Contabilidade
AICPA proposes updates to audit and accounting guide for the gaming industry
The AICPA’s Financial Reporting Executive Committee proposed updates to the AICPA Audit and Accounting Guide, Gaming. The proposed updates would address gaming entities’ determination of whether various pricing arrangements convey a lease under ASC Topic 842, Leases.
The deadline for submitting comments is December 19, 2019.
ASB proposes three-year plan
The AICPA’s Auditing Standards Board (ASB) proposed a strategy and work plan to guide the ASB’s work over the next three years.
The proposal includes five strategic initiatives:
- Develop high-quality standards in the public interest
- Enhance communications with stakeholders
- Think and operate more strategically
- Keep standards relevant in a changing environment
- Support the effective application of our standards
The deadline for submitting comments is January 31, 2020.
Grant Thornton names Bradley J. Preber as CEO
The Partnership Board at Grant Thornton LLP announced that Bradley J. Preber will serve as the firm’s CEO. The Board appointed Preber to the role following a comprehensive search process, and the firm’s partners and principals ratified the selection. Preber has been serving as Grant Thornton’s interim CEO since June 2019 and will now serve as the firm’s CEO through July 31, 2022.
CAQ publishes 2019 Audit Committee Transparency Barometer
A report issued jointly by the CAQ and Audit Analytics, the Audit Committee Transparency Barometer (Barometer) tracks S&P Composite 1500 proxy disclosures to gauge transparency around audit committee oversight of the external auditor and other key financial reporting topics.
In addition to presenting statistics on disclosure trends, the Barometer offers disclosure examples to illustrate how audit committees are enhancing information for investors and others. The Barometer shows that although growth has been steady in the amount of information provided in audit committee disclosures, significant opportunities continue to exist to enhance transparency in this area.
Profession in Focus: Audit Committee Transparency
This edition of Profession in Focus, provides a high-level overview of the Barometer from the CAQ’s Vanessa Teitelbaum, CPA, Technical Director of Professional Practice, and Matt Sickmiller, CPA, Technical Manager of Professional Practice. Teitelbaum and Sickmiller discuss how and why the CAQ has worked with Audit Analytics to track trends in audit committee disclosure, as well as opportunities to enhance this disclosure that are highlighted in the 2019 edition of the Barometer.
CAQ issues RFP for academic research in auditing
The CAQ issued its annual request for proposals (RFP) to fund independent academic research on topics of interest to the auditing profession. The CAQ’s Research Advisory Board (RAB) is keenly interested in research questions that can inform audit practice or address policy and regulatory issues that impact audit quality and the profession. Researchers are encouraged to develop research questions and determine the most appropriate methodology to address those questions. The RAB supports studies employing a wide range of research methodologies, including archival studies, meta analyses, modeling, literature reviews, and behavioral/experimental research studies.
The key topics of interest for 2020 are:
- Corporate Disclosures over Non-Financial Information
- Non-GAAP Measures
CAQ comments on the SEC’s Proposed Rule, Update of Statistical Disclosures for Bank and Savings and Loan Registrants
The CAQ shared views and input on the SEC’s Proposed Rule, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. Providing its comments through the lens of the public company audit profession, the CAQ expressed general support for the SEC’s effort to streamline and modernize Guide 3, Statistical Disclosures for Bank and Savings and Loan Registrants (Guide 3), including the elimination of outdated or duplicative disclosures and the codification of Guide 3 into new Subpart 1400 of Regulation S-K. The CAQ also offered suggestions to help the SEC achieve its objective and to enable registrants and auditors to avoid unnecessary challenges when applying the proposed disclosure requirements, while still providing useful information for investors.
AICPA Employee Benefit Plans Accounting, Auditing and Regulatory Update Online Conference
AICPA Conference on Current SEC and PCAOB Developments, Washington, DC
IAASB Board Meeting, New York, NY
Senate Banking Committee Hearing: Oversight of the Securities and Exchange Commission, Washington, DC
IASB Board Meeting, London, UK
PLI 35th Annual SEC Reporting & FASB Forum, New York, NY and Webcast
SEC Open Meeting, Washington, DC
American Accounting Association Auditing Midyear Meeting, Houston, TX
American Accounting Association Financial Accounting and Reporting Section, Nashville, TN
ICGN Conference, Seoul, Korea
PLI’s Corporate Governance – A Master Class 2020, New York, NY
AICPA Employee Benefit Plans Conference, Las Vegas, NV
The Center for Audit Quality is an autonomous, nonpartisan, nonprofit organization dedicated to enhancing investor confidence and public trust in the global capital markets by fostering high-quality public company audits; collaborating with other stakeholders to advance the discussion of critical issues; and advocating policies and standards that promote public company auditors’ objectivity, effectiveness and responsiveness to dynamic market conditions. Based in Washington, D.C., the CAQ is affiliated with the American Institute of CPAs. For more information, visit 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.
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