PUBLIC POLICY AND TECHNICAL ALERT, SEPTEMBER 2019
Friday, October 4, 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:
- SEC adopts new rule to allow all issuers to ‘test-the-waters’
- SEC proposes rules to update statistical disclosures for banking registrants
- SEC adopts new rules and amendments under Title VII of Dodd-Frank
- SEC explores possible new rules on auditor independence
- FASB proposes guidance to assist in transition away from interbank offered rates to new reference rates
- FASB issues revised proposal to improve balance sheet debt classification
- IASB amends IFRS standards in response to the IBOR reform
- IASB discusses goodwill and impairment research project
- IAASB report summarizes achievements since 2016
- FRC strengthens going concern audit standard
- FRC publishes annual report as the transition to a new regulator progresses
- AICPA practice aid offers guidance on credit losses for auditors
- House passes PCAOB whistleblower bill
- Banking regulators propose repeal of margin and capital requirements for covered swap entities
- CII Board appoints Amy Borrus to succeed Ken Bertsch as Executive Director
- CAQ releases it’s 13th annual Main Street Investor Survey
- CAQ issues new ‘Profession in Focus’ video
- CAQ taps Amy O’Connor to lead Stakeholder Engagement and Communications team
SEC adopts new rule to allow all issuers to ‘test-the-waters’
The SEC adopted a new rule that extends a “test-the-waters” accommodation – currently a tool available to emerging growth companies – to all issuers. Under the new rule, all issuers will be allowed to gauge market interest in a possible initial public offering or other registered securities offering through discussions with certain institutional investors prior to, or following, the filing of a registration statement.
Securities Act Rule 163B will permit any issuer, or any person authorized to act on its behalf, to engage in oral or written communications with potential investors that are, or are reasonably believed to be, qualified institutional buyers or institutional accredited investors, either prior to or following the filing of a registration statement, to determine whether such investors might have an interest in a contemplated registered securities offering. The rule is non-exclusive and an issuer may rely on other Securities Act communications rules or exemptions when determining how, when, and what to communicate about a contemplated securities offering.
SEC proposes rules to update statistical disclosures for banking registrants
The SEC proposed rules to update the statistical disclosures that bank and savings and loan registrants provide to investors, and eliminate disclosures that overlap with SEC rules, US GAAP, or IFRS. The proposed rules would replace Industry Guide 3, Statistical Disclosure by Bank Holding Companies, with updated disclosure in a new subpart of Regulation S-K. The proposed rules would apply to bank holding companies, banks, savings and loan holding companies, and savings and loan associations.
The proposed rules would require disclosure about the following:
- Distribution of assets, liabilities and stockholders’ equity, the related interest income and expense, and interest rates and interest differential;
- Weighted average yield of investments in debt securities by maturity;
- Maturity analysis of the loan portfolio including the amounts that have predetermined interest rates and floating or adjustable interest rates;
- An allocation of the allowance for credit losses and certain credit ratios; and
- Information about bank deposits including amounts that are uninsured.
The deadline for submitting comments will be 60 days after publication in the Federal Register.
SEC adopts new rules and amendments under Title VII of Dodd-Frank
The SEC adopted a package of rules and rule amendments under Title VII of the Dodd-Frank Act. The actions establish recordkeeping and reporting requirements for security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs) and amend the recordkeeping and reporting requirements for broker-dealers. Under the new rules, these companies will be required to create and retain fundamental business records to document and track their operations, facilitating the SEC’s ability to monitor compliance and reducing risk to the market.
The new rules and rule amendments address seven key areas:
- They establish record making requirements for SBSDs and MSBSPs and amend the existing record making requirements for broker-dealers to account for their security-based swap activities.
- They establish record preservation requirements for SBSDs and MSBSPs and amend the existing record preservation requirements for broker-dealers to address records relating to their security-based swap activities.
- They establish periodic reporting and annual audit requirements for SBSDs and MSBSPs and amend the existing reporting requirements for broker-dealers to account for their security-based swap activities.
- They establish early warning notification requirements for SBSDs and MSBSPs.
- They establish security count requirements for SBSDs that are not registered as broker-dealers and do not have a prudential regulator (stand-alone SBSDs).
- They amend the SEC’s existing cross-border rule to provide a means to request substituted compliance with respect to the recordkeeping and reporting requirements for SBSDs and MSBSPs.
- They amend a rule that permits certain SBSDs that are registered as swap dealers and predominantly engage in a swaps business to comply with US Commodity Futures Trading Commission requirements in lieu of SEC requirements.
SEC explores possible new rules on auditor independence
SEC Chief Accountant Sagar Teotia, in remarks at the AICPA National Conference on Banks & Savings Institutions, said Chairman Jay Clayton “has directed staff to formulate recommendations to the Commission for possible additional changes to the auditor independence rules for potential future rulemaking.”
Teotia added that “investor confidence in financial reporting is highly dependent on auditors’ commitment to independence, both in fact and in appearance. Auditor independence lies at the very foundation of the profession and is necessary to reduce threats to auditors’ objectivity and lend credibility to the fair presentation of the financial statements.”
FASB proposes guidance to assist in transition away from interbank offered rates to new reference rates
The FASB issued Proposed Accounting Standards Update (ASU), Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which would provide temporary optional guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting.
The proposed ASU would provide optional expedients and exceptions for applying US GAAP to contract modifications and hedging relationships affected by reference rate reform. The guidance would apply only to contracts or hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform.
The deadline for submitting comments is October 7, 2019.
FASB issues revised proposal to improve balance sheet debt classification
The FASB issued Proposed ASU (Revised), Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent). The proposed ASU aims to improve guidance used to determine whether debt should be classified as a current or noncurrent liability in a classified balance sheet.
The proposed ASU would introduce a principle for determining whether debt or other instruments within the scope of the proposed amendments would be classified as a noncurrent liability as of the balance sheet date. According to that principle, an entity would classify an instrument as noncurrent if either of the following criteria is met as of the balance sheet date:
- The liability is contractually due to be settled more than one year (or operating cycle, if longer) after the balance sheet date.
- The entity has a contractual right to defer settlement of the liability for a period greater than one year (or operating cycle, if longer) after the balance sheet date.
The proposed ASU also would require more comprehensive disclosures about defaults resulting from violations of a loan covenant, grace periods within which a debtor may cure a violation, and triggers of a subjective acceleration clause.
The deadline for submitting comments is October 28, 2019.
IASB amends IFRS standards in response to the IBOR reform
The IASB amended some of its requirements for hedge accounting. The amendments are designed to support the provision of useful financial information by companies during the period of uncertainty arising from the phasing out of interest-rate benchmarks such as interbank offered rates (IBOR).
The IASB amended its new and old financial instruments standards, IFRS 9, Financial Instruments, and IAS 39, Financial Instruments: Recognition and Measurement, as well as the related standard on disclosures, IFRS 7, Financial Instruments: Disclosures. The amendments modify some specific hedge accounting requirements to provide relief from potential effects of the uncertainty caused by the IBOR reform. In addition, the amendments require companies to provide additional information to investors about their hedging relationships which are directly affected by these uncertainties.
IASB discusses goodwill and impairment research project
The IASB is carrying out a research project on goodwill and impairment following its Post-implementation Review of IFRS 3, Business Combinations. The IASB is investigating how companies can provide users of financial statements with better information about mergers and acquisitions (business combinations) at a reasonable cost. The investigation includes the challenging question of how companies should account for goodwill after the business combination.
In an article posted on the IFRS website, IASB Member Tom Scott discusses the IASB’s preliminary views and how stakeholders can help the IASB by commenting on its forthcoming discussion paper.
IAASB report summarizes achievements since 2016
The IAASB released Foundation for the Future, which summarizes its achievements from January 1, 2016 to June 30, 2019. In line with the 2015-2019 strategy, the IAASB’s activities have focused on enhancing audit quality and addressing engagements other than audits of financial statements. The IAASB also has increasingly focused on what more can be done to better understand and address the challenges some practitioners face in applying International Standards on Auditing in audits of less complex entities.
FRC strengthens going concern audit standard
UK Financial Reporting Council (FRC) issued a revised going concern standard in response to recent enforcement cases and well-publicized corporate failures where the auditor’s report failed to highlight concerns about the prospects of entities which collapsed shortly after.The revised standard – International Standard on Auditing (UK) 570, Going Concern – requires a more robust challenge of management’s assessment of going concern and a stand back requirement to consider all of the evidence obtained, whether corroborative or contradictory, when the auditor draws their conclusions on going concern.
FRC publishes annual report as the transition to a new regulator progresses
The FRC published its annual report for 2018/19 setting out its progress against commitments to tackle poor-quality audit work, boost enforcement resourcing, and improve the quality of reporting. During the year, the FRC substantially revised the UK’s Corporate Governance Code and consulted on an overhaul of the UK Stewardship Code to ensure both codes are fit for purpose, better aligned, and reflect today’s challenges. Work undertaken in 2018/19 also laid the foundations for the FRC’s transition to a new, more powerful regulator, following Sir John Kingman’s independent review.
AICPA practice aid offers guidance on credit losses for auditors
The AICPA issued non-authoritative guidance in the form of a practice aid, Allowance For Credit Losses – Audit Considerations, to assist auditors when communicating with management and audit committees on Accounting Standards Codification 326, Financial Instruments – Credit Losses.
The practice aid highlights key areas within the auditing process, including:
- Obtaining an understanding of the entity;
- Assessing the risks;
- Identifying the controls relevant to the audit;
- Designing an audit response;
- Performing audit procedures; and
- Evaluating the audit and disclosure considerations.
House passes PCAOB whistleblower bill
The House of Representatives passed H.R. 3625, the “PCAOB Whistleblower Protection Act of 2019,” by a voice vote. The bill would establish a whistleblower program at the PCAOB similar to the whistleblower program at the SEC.
Banking regulators propose repeal of margin and capital requirements for covered swap entities
The Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Farm Credit Administration, and Federal Housing Finance Agency proposed a rule to amend the agencies’ regulations that require swap dealers and security-based swap dealers under the agencies’ respective jurisdictions to exchange margin with their counterparties for swaps that are not centrally cleared.
The deadline for submitting comments will be 30 days following publication in the Federal Register.
CII Board appoints Amy Borrus to succeed Ken Bertsch as Executive Director
The Board of Directors of the Council of Institutional Investors (CII) announced that Amy Borrus, currently CII’s deputy director, will succeed Ken Bertsch as executive director when he retires in August 2020.
CAQ releases it’s 13th annual Main Street Investor Survey
On September 17, the CAQ issued it’s 13th annual Main Street Investor Survey. The annual CAQ poll captures the views of US retail investors with at least $10,000 invested in the capital markets through retirement plans or direct holdings.
The 2019 survey’s key findings include the following:
- 83% of US investors express confidence that public company auditors are effective in their investor protection roles, up two points from 2018;
- 74% of US investors express confidence in US capital markets, unchanged from 2018 levels;
- 76% of US investors have confidence in US companies that are publicly traded, down two points from 2018;
- 78% of US investors express confidence in audited financial statements, up three points from 2018; and
- 47% of US investors have confidence in capital markets outside the US, down significantly from a level of 56% in 2018.
CAQ issues new ‘Profession in Focus’ video
In this edition of the CAQ’s “Profession in Focus” video series, Executive Director Julie Bell Lindsay discusses the state of US investor confidence. She provides context on the importance of strong investor confidence for the capital markets, gives an overview of the CAQ’s annual Main Street Investor Survey, and touches on a few of its key findings in 2019.
CAQ taps Amy O’Connor to lead Stakeholder Engagement and Communications team
The CAQ hired Amy O’Connor as Senior Director of Stakeholder Engagement and Communications. O’Connor brings a broad range of experience, including holding senior communications and engagement strategy roles at the Business Roundtable and Eli Lilly and Company.
ICGN Conference, Miami, FL
AICPA/SIFMA FMS National Conference on the Securities Industry, New York, NY and Webcast
ICGN Stewardship & Sustainability Course, Miami, FL
AICPA Conference on Credit Unions, Nashville, TN
IASB Board Meeting, London, UK
Securities Enforcement Forum 2019, Washington, DC
NACD Webcast: Why Data Privacy Matters in a Public World
AICPA Women’s Global Leadership Summit, San Diego, CA
PLI 35th Annual SEC Reporting & FASB Forum, Dallas, TX
AICPA Oil & Gas Conference, Denver, CO
FEI Corporate Financial Reporting Insights Conference, New York, NY
FT-ODX (Outstanding Directors Exchange), New York, NY
FASB public roundtable: Identifiable Intangible Assets and Subsequent Accounting for Goodwill, Norwalk, CT
IASB Board Meeting, London, UK
SIFMA Annual Meeting, Washington, DC
PLI Directors’ Institute on Corporate Governance, New York, NY
ICGN 2019 Global Stewardship Forum, London, UK
PLI 35th Annual SEC Reporting & FASB Forum, San Francisco, CA
AICPA Construction & Real Estate Conference, Nashville, TN
AICPA Employee Benefit Plans Accounting, Auditing and Regulatory Update Online Conference
AICPA Conference on Current SEC and PCAOB Developments, Washington, DC
IASB Board Meeting, London, UK
PLI 35th Annual SEC Reporting & FASB Forum, New York, NY and Webcast
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 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.
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