Financial reporting update

Transcription

1 Financial reporting update Recap of the 2016 AICPA Conference on Current SEC and PCAOB Developments January 2017 Please disable popup blocking software before viewing this webcast Original Publication Date: January 12, 2017 CPE Credit is not available for viewing archived programs

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3 Addressing your questions through Q&A If you experience any technical difficulties, please contact or Grant Thornton LLP. All rights reserved. 3

4 Other helpful features you can use Be sure to shut down all other applications to allow more Internet bandwidth. Slides Help Resources Share If you experience any technical difficulties, please contact or Grant Thornton LLP. All rights reserved. 4

5 Today s presenters Bridgette Hodges Partner-in-charge SEC Regulatory Matters Washington D.C. Kendra Decker Partner SEC Regulatory Matters Washington D.C. Rohit Elhance Partner SEC Regulatory Matters Washington D.C. Rahul Gupta Partner Accounting Principles Chicago Grant Thornton LLP. All rights reserved. 5

6 Learning objectives Explain the status of relevant SEC, FASB and PCAOB rulemaking initiatives Describe the views of SEC and FASB representatives on a variety of accounting and reporting matters Recognize critical issues affecting SEC reporting companies Grant Thornton LLP. All rights reserved. 6

7 Agenda Conference overview SEC compliance Accounting and reporting matters Auditing matters Next steps & resources Grant Thornton LLP. All rights reserved. 7

8 Overview Conference themes Work together to strengthen U.S. capital markets See Grant Thornton LLP s New Developments Summary , Highlights of the 2016 AICPA Conference on Current SEC and PCAOB Developments Implementation of new accounting standards Investor protection Quality and credibility of non-gaap financial measures Grant Thornton LLP. All rights reserved. 8

9 Agenda Conference overview SEC compliance Accounting and reporting matters Auditing matters Next steps & resources Grant Thornton LLP. All rights reserved. 9

10 SEC compliance Current landscape Enforcement Rulemaking Disclosure effectiveness Grant Thornton LLP. All rights reserved. 10

11 SEC compliance Disclosure effectiveness Continued efforts and ongoing initiatives Report on Modernization and Simplification of Regulation S-K Regulation S-K Concept Release Disclosure Update and Simplification Proposing Release (DUSTR) Grant Thornton LLP. All rights reserved. 11

12 SEC compliance Use of IFRS by domestic issuers U.S. GAAP will best serve the needs of investors for the foreseeable future Emphasis on future collaboration between the FASB and IASB Unlikely that domestic issuers will have the option in the near future to use IFRS to prepare their primary financial statements Grant Thornton LLP. All rights reserved. 12

13 Agenda Conference overview SEC compliance Accounting and reporting matters Auditing matters Next steps & resources Grant Thornton LLP. All rights reserved. 13

14 Accounting and reporting Non-GAAP financial measures Remarks from senior SEC officials throughout 2016 Compliance and Disclosure Interpretations (C&DIs) updated in May 2016 Registrants review non-gaap disclosures and many selfcorrect, as needed Continued emphasis on the role of preparers and audit committees SEC staff issues comment letters on non-gaap financial measures Grant Thornton LLP. All rights reserved. 14

15 Accounting and reporting Frequent areas of SEC staff comment Prominence Individually tailored accounting principles Forwardlooking The GAAP financial measure should be more prominent than the non-gaap financial measure Acceleration of revenue and consolidation of equity method investees are inappropriate Reconciliation requirement also applies to forwardlooking non-gaap financial measures Grant Thornton LLP. All rights reserved. 15

16 Accounting and reporting SAB 74 disclosures Disclose the impact that recently issued accounting standards will have on the financial statements in accordance with SAB 74 If impact unknown, consider the following additional disclosures: Important for the new revenue, leases, and credit losses standards Qualitative disclosures: Effect of accounting policies an entity expects to apply and comparison to current accounting policies Status of implementation Significant matters yet to be addressed Quantitative disclosures: Known or reasonably estimable information, even if only for a subset of the entity's arrangements Grant Thornton LLP. All rights reserved. 16

17 Accounting and reporting SAB 74 disclosures (continued) Disclosure subject to effective internal control over financial reporting Ensure disclosures are consistent with other information provided to investors, audit committee and other stakeholders Applicable for U.S. GAAP or IFRS Grant Thornton LLP. All rights reserved. 17

18 Accounting and reporting Revenue resources FASB webcasts FASB technical inquiry service TRG meeting archives, staff papers and summaries AICPA industry task forces' issue papers OCA consultation service fasb.org aicpa.org sec.gov Grant Thornton LLP. All rights reserved. 18

19 Accounting and reporting Implementation of new accounting standards Changes in ICFR Staff guidance Regulation S-K, Item 308(c), Changes in internal control over financial reporting Financial Reporting Manual, Topic 11 ASU , Revenue from Contracts with Customers ASU , Leases ASU , Disclosures about Short-Duration Contracts Grant Thornton LLP. All rights reserved. 19

20 SEC staff views on certain revenue topics Grant Thornton LLP. All rights reserved. 20

21 Accounting and reporting Status of SAB Topic 13 Adoption Date Existing U.S. GAAP ASC 606 SAB 13 continues to apply Grant Thornton LLP. All rights reserved. 21

22 Accounting and reporting Contract combination guidance Combine two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) if one or more of the following criteria are met: a. The contracts are negotiated as a package with a single commercial objective b. The amount of consideration to be paid in one contract depends on the price or performance of the other contract c. The goods/services promised in the contracts are a single performance obligation Staff view: Contracts that are not with the same customer or related parties do not meet the contract combination guidance in ASC 606, even if all other criteria are met. Grant Thornton LLP. All rights reserved. 22

23 Accounting and reporting Payments to customers Apply ASC 606, the Basis for Conclusions, other relevant GAAP, definition of an asset, and relevant TRG discussions Understand the nature and substance of the payment What is the underlying economic reason for the transaction? How does the registrant communicate and describe the payment to investors? What are the stipulations of the payment? What is the basis for recognizing an asset or recognizing through earnings? Grant Thornton LLP. All rights reserved. 23

24 Accounting and reporting Principal versus agent analysis Are we acting as principal or agent? Existing U. S. GAAP (Risks and rewardsbased model) ASC 606 (Control-based model) Principal Agent Principal Agent Conclusion could differ! There is no default or safe harbor Should be a focus point for all entities Grant Thornton LLP. All rights reserved. 24

25 Accounting and reporting New revenue standard: full retrospective adoption Requirement to retroactively revise previously issued financial statements in connection with certain SEC filings May result in requirement to recast an additional year and file retrospectively revised financial statements earlier Applies to certain new and amended registration statements, including amendments due to a "fundamental change" Impracticability exception Grant Thornton LLP. All rights reserved. 25

26 Accounting and reporting New revenue standard: modified retrospective adoption Supplemental MD&A Opportunity to explain results as if the new revenue standard had been applied in all periods presented Remember: Supplemental full income statement is not permitted Disclose 1) corresponding impact to other accounts, such as expenses and 2) assumptions and practical expedients Grant Thornton LLP. All rights reserved. 26

27 Accounting and reporting Leases Board will not address day one loss on sales-type lease with significant variable payments No need to re-allocate asset group impairment losses incurred during transition Fair market rent adjustments are considered to be based on a rate or index Challenges in determining if secondary uses of assets constitute leases and identifying leases embedded in service contracts Grant Thornton LLP. All rights reserved. 27

28 Accounting and reporting Credit losses Actively assess implementation efforts Allocate appropriate time and resources Identify implementation issues and raise to the appropriate forum (for example, the TRG) Continue to apply FRR No. 28, Accounting For Loan Losses By Registrants Engaged in Lending Activities SAB 102, Selected Loan Loss Allowance Methodology and Documentation Issues Grant Thornton LLP. All rights reserved. 28

29 SEC staff views on certain accounting topics Grant Thornton LLP. All rights reserved. 29

30 Accounting and reporting Instrument-specific credit risk of financial liabilities measured at fair value Requirement to present instrument-specific credit risk separately in OCI also applies to hybrid financial liabilities measured at FV using the FVO in ASC 815 When repayment of a financial liability is solely tied to the value or cash flows of the collateral, no portion would be attributable to instrumentspecific credit risk Considering instrumentspecific credit risk to be the portion of total change in fair value that excludes the amount resulting from a change in a base market risk may not always be appropriate Grant Thornton LLP. All rights reserved. 30

31 Accounting and reporting Definition of a public business entity and implications Public business entity (PBE): A public business entity is a business entity meeting any one of the criteria below: a. It is required by the SEC to file or furnish financial statements, or does file or furnish financial statements, with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing) Staff view: Amounts recognized by a registrant for its share of the earnings/losses of an equity method investee would not be considered financial information included in a filing with the SEC for purposes of applying the definition of a PBE Grant Thornton LLP. All rights reserved. 31

32 Accounting and reporting CorpFin staff observations Overall decrease in number of comments Avoid undue reliance on other registrants' filings Comment process = dialogue Grant Thornton LLP. All rights reserved. 32

33 Accounting and reporting Income taxes SEC staff expects registrants to explain: Reasons for changes in effective tax rates Reasons for changes in reconciling items between effective and statutory tax rates Whether the past effective tax rate is indicative of the future Uncertainties related to tax positions Effect of income taxes on liquidity CorpFin staff expects to issue more comments on 2016 annual reports if disclosures do not improve Grant Thornton LLP. All rights reserved. 33

34 Accounting and reporting Segment reporting Identification of operating segments Discrete financial information Aggregation of operating segments What is "similar?" Enterprise-wide and other disclosures Impracticability Basis of organization Grant Thornton LLP. All rights reserved. 34

35 Accounting and reporting Loss contingencies Accruals or disclosures not on a timely basis No disclosure has been made with respect to the range of reasonably possible loss Grant Thornton LLP. All rights reserved. 35

36 Agenda Conference overview SEC compliance Accounting and reporting matters Auditing matters Next steps & resources Grant Thornton LLP. All rights reserved. 36

37 Audit matters Internal control over financial reporting Improvements made Positive interactions and continued outreach among SEC, PCAOB and the preparer community Active engagement from audit committees Better coordination of communications among management, auditors and the audit committee Additional attention needed Timing and depth of auditor communications Senior members of the audit team being engaged in the details and design of ICFR testing Preparer assessment of internal control findings Frequent and candid communication is critical! Grant Thornton LLP. All rights reserved. 37

38 Audit matters PCAOB standard-setting update Auditor Reporting Estimates and Use of Specialists Supervision of Other Auditors Going Concern Retain pass/fail model Critical Audit Matters (CAM) Clarify existing responsibilities Auditor tenure and independence Section titles and ordering Separate projects being coordinated Measurement uncertainty Professional skepticism Use of pricing services Better alignment with risk assessment standards Company specialists versus auditor specialists Sufficiency determination Understanding qualifications Single approach to supervision Separate standard on divided responsibility Evaluating next steps in light of new accounting requirement Practice Alert 13 auditors should still prepare separate assessment Grant Thornton LLP. All rights reserved. 38

39 Audit matters PCAOB standard-setting update (continued) Planned Research Agenda 1 Quality control standards 3 Company performance measures, including non-gaap measures 2 Use of data analytics in the conduct of an audit 4 Consideration of noncompliance with laws and regulations PCAOB will continue to monitor topics such as fraud, cybersecurity, audit quality indicators and new accounting standards Grant Thornton LLP. All rights reserved. 39

40 Audit matters PCAOB inspection and enforcement update Focus areas ICFR; Related parties; Independence 2016 Inspection Cycle Improvements Understanding of the issuer; Team coaching; Monitoring Findings ICFR; Risk assessment; Estimates, including fair values Grant Thornton LLP. All rights reserved. 40

41 Audit matters PCAOB inspection and enforcement update 2017 Inspection Expected Focus Areas Recurring deficiencies (ICFR, estimates, risk assessment) Areas affected by economic trends and higher financial reporting risk Implementation of new Transparency (Form AP) standard National office tools and guidance for new accounting standards (revenue recognition and leases) Going concern Information-gathering on non-gaap measures Enforcement Priorities Lack of professional skepticism Independence Integrity of the audit and PCAOB oversight Cross-border audits (continued) Grant Thornton LLP. All rights reserved. 41

42 Audit matters Independence Auditor Independence Nonaudit services Monitor progress of services to avoid scope creep Evaluation of SEC overarching independence principles Auditor discussions with clients related to new accounting standards Audit committees are responsible for monitoring external auditors to promote auditor independence SEC enforcement actions close personal relationships Relationship with Chief Accounting Officer Excessive entertainment expenses Robust policies Independence requirements Actively monitor Nonaudit services and relationships Tone at the top Focus on commitment to quality Grant Thornton LLP. All rights reserved. 42

43 Other matters Evolving role of technology: Cybersecurity 1 Threat landscape is always changing; be adaptive and implement controls that are responsive 2 Retain appropriate subject-matter experts (internally or consultants) 3 Recognize and appreciate this is a "business issue" not an "IT issue" 4 AICPA projects aim to facilitate communication in a flexible and responsive process Grant Thornton LLP. All rights reserved. 43

44 Other matters Data analytics Use by the SEC Corporate Issuer Risk Assessment program (CIRA) Potential audit applications Increase audit effectiveness Grant Thornton LLP. All rights reserved. 44

45 Agenda Conference overview SEC compliance Accounting and reporting matters Auditing matters Next steps & resources Grant Thornton LLP. All rights reserved. 45

46 Wrap-up Next steps Prepare for implementation of the new accounting standards Collaborating to protect investors Continue disclosure improvement Monitor compliance of non-gaap measures Grant Thornton LLP. All rights reserved. 46

47 SEC Resources SAB Topic 11.M. 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 74) Financial Reporting Manual Compliance & Disclosure Interpretations, Non-GAAP Financial Measures Grant Thornton LLP. All rights reserved. 47

48 Other Resources CAQ Questions on Non-GAAP Measures: A Tool for Audit Committees Non-GAAP Financial Measures: Continuing the Conversation Preparing for New Revenue Recognition Standard: A Tool for Audit Committees Revenue FASB webcasts; technical inquiry service; and TRG archives AICPA industry task force issued papers Grant Thornton LLP. All rights reserved. 48

49 Questions? Grant Thornton LLP. All rights reserved. 49

50 Today's presenters Bridgette Hodges Partner-in-charge SEC Regulatory Matters Washington D.C. Kendra Decker Partner SEC Regulatory Matters Washington D.C. Rohit Elhance Partner SEC Regulatory Matters Washington D.C. Rahul Gupta Partner Accounting Principles Chicago Grant Thornton LLP. All rights reserved. 50

51 Disclaimer This Grant Thornton LLP presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before it is issued in final form. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this presentation. The views and interpretations expressed in the presentation are those of the presenters and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered. For additional information on matters covered in this presentation, contact your Grant Thornton, LLP adviser. Grant Thornton LLP. All rights reserved. 51

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