Search within this section
Select a section below and enter your search term, or to search all click 2023 AICPA & CIMA Conference: Current SEC and PCAOB Developments
Favorited Content
2023 AICPA & CIMA Conference: Current SEC and PCAOB Developments
Publication date: 08 Dec 2023
us In depth 2023-10
A PDF version of this publication is attached here: 2023 AICPA & CIMA Conference: Current SEC and PCAOB Developments (PDF 259kb)
At a glance
Representatives from the SEC, PCAOB, FASB, and IASB, along with many other distinguished speakers, participated in the 2023 AICPA & CIMA Conference on Current SEC and PCAOB Developments. Speakers discussed various accounting, reporting, auditing, and regulatory hot topics. This In depth provides highlights from the Conference.
The 2023 AICPA & CIMA Conference on Current SEC and PCAOB Developments (the Conference) took place from December 4-6. Key themes included the challenges resulting from an uncertain economic environment and rapid changes driven by new regulations and technology. Speakers emphasized the importance of robust financial statement disclosure in the current environment, reminding participants that financial reporting is a communication tool, not a compliance exercise.
Representatives from the SEC discussed various accounting and reporting matters, including recently issued SEC rules; however, the SEC did not comment on the timing of the final climate disclosure rule, or any other pending rulemaking.
Other themes included the accounting profession’s talent pipeline, the importance of all stakeholders being actively engaged in the standard-setting process, and audit quality. Two sessions were devoted to the impact of technology and AI on investors and preparers.
Accounting and reporting matters
Representatives from the SEC’s Office of the Chief Accountant (OCA) and Division of Corporation Finance (CF) discussed the following accounting and reporting topics.
Segment reporting
The SEC staff addressed various items in connection with the FASB’s recently issued segment reporting guidance in ASU 2023-07. Under the new ASU, if a chief operating decision maker (CODM) uses multiple measures of a segment’s profit or loss to assess segment performance and allocate resources, the reporting entity is permitted to disclose multiple measures of segment profit or loss for each reportable segment. Consistent with current guidance, the reporting entity is required to disclose, at a minimum, the measure of segment profit or loss that is most consistent with the amounts included in its consolidated financial statements. Refer to our In depth, FASB updates segments guidance, for further information on the new ASU.
CF staff provided their view that additional optional measures of segment profit or loss beyond the single measure required to be disclosed under US GAAP would be considered a non-GAAP financial measure (if not calculated in accordance with GAAP) because that measure would not qualify for the exception in the non-GAAP financial measures requirements. Accordingly, these measures would be subject to the SEC rules and regulations regarding the use of non-GAAP financial measures. Notably, S-K Item 10(e) includes specific presentation, disclosure, and reconciliation requirements; prohibitions on certain adjustments; and a prohibition on the inclusion of a non-GAAP financial measure in the financial statements. CF staff stated that registrants planning to early adopt the new segment guidance and present a measure of segment profit or loss (that is not calculated in accordance with GAAP) beyond the required measure should contact the CF staff for further discussion.
The new segment reporting guidance clarifies that all of the required disclosures also apply to reporting entities with a single reportable segment, including the requirement to disclose a measure of segment profit or loss that is most consistent with the amounts included in its consolidated financial statements. OCA staff commented that for an entity with a single reportable segment managed on a consolidated basis, they would expect the required measure to be consolidated net income.
CF staff also reminded registrants that the segment reporting guidance specifically requires disclosure of “revenues from external customers” for each reportable segment. They stated that this amount should reflect a GAAP measure of revenue even if the CODM regularly reviews a segment revenue measure that is adjusted (e.g., to add back amounts that GAAP requires presenting as a reduction of revenue).
Statement of cash flows
SEC Chief Accountant Paul Munter provided feedback on the statement of cash flows in conjunction with the issuance of a new public statement on the topic. Munter reiterated that the statement of cash flows should have the same level of rigor and attention as the other primary statements. He also emphasized that the evaluation of errors in the cash flow statement should consider both quantitative and qualitative factors and should not be dismissed as simply “reclassifications” since the focus of the statement is classification of cash flows. Munter also provided his view that reporting operating cash flows under the direct method provides decision-useful information to investors.
Fair value measurements
OCA staff discussed various topics related to the application of the guidance in ASC 820, Fair Value Measurement.
Crypto assets
OCA staff noted that final FASB guidance on accounting for crypto assets (expected before the end of the year) will require certain crypto assets to be subsequently measured at fair value. The staff highlighted that markets for crypto assets may not function in the same way as traditional equity or commodity markets and therefore, identifying the principal market (or most advantageous market, in the absence of a principal market) for crypto assets may require significant judgment. As crypto markets rapidly evolve, the facts and circumstances relevant to identifying the principal (or most advantageous) market may change over time and may differ from asset-to-asset or entity-to-entity.
Collateral-dependent financial assets
OCA staff discussed a practical expedient in ASC 326, Financial Instruments – Credit Losses, that permits the allowance for a collateral-dependent financial asset to be estimated using the fair value of the underlying collateral. This practical expedient can be elected when two conditions are met: (1) the borrower must be experiencing financial difficulty and (2) repayment should be expected through either sale or operation of the underlying collateral. Additionally, if it is probable that the reporting entity will foreclose on the collateral associated with a collateral-dependent loan, the allowance should be based on the fair value of the collateral. OCA staff reminded companies that the underlying collateral is required to be measured under ASC 820, including application of the market participant perspective. Significant judgment may be required to determine fair value when collateral assets are illiquid.
Valuation techniques and disclosures
OCA staff provided reminders about the use of valuation techniques, noting that the technique used could be affected by several variables, but should generally maximize the use of observable inputs. OCA staff specifically reminded participants about guidance in ASC 820-10-35-24C that requires calibration of valuation techniques in certain circumstances. Calibration of valuation techniques is required when both (1) the transaction price is fair value at initial recognition and (2) a valuation technique using unobservable inputs will be used to measure fair value in subsequent periods. As stated in the guidance, calibration ensures that the valuation technique used reflects current market conditions and helps reporting entities determine if an adjustment to the valuation technique is necessary.
OCA staff also highlighted the importance of fair value measurement disclosures, emphasizing that they are intended to help users of the financial statements (1) assess valuation techniques and inputs that are used in measuring fair value and (2) assess the financial statement effects of fair value measurements that use significant unobservable inputs.
Other topics
OCA staff shared examples of recent accounting consultations and reminded participants that the OCA staff is available for consultation on complex or novel arrangements.
SPAC financing arrangement
OCA staff discussed an arrangement entered into by a SPAC close to its proposed acquisition, identified as a “backstop agreement.” In the arrangement described by the staff, the SPAC transferred cash to a third-party entity that purchases equity securities of the SPAC. At the end of a specified time period, the third party would either: (a) deliver the shares to the SPAC and keep the cash transferred by the SPAC or (b) sell the equity shares and return the cash to the SPAC. The SPAC was also required to pay a stated amount to the third party at the end of the specified time period. The staff indicated that they objected to accounting for the arrangement as an asset pursuant to ASC 480, Distinguishing Liabilities from Equity. They believe the arrangement had an element similar to a subscription receivable on the entity’s own shares, which is required to be presented as a reduction of equity pursuant to S-X Rule 5-02. The staff did not provide any views on the subsequent accounting for the arrangement. The staff encouraged consultation with OCA on similar transactions.
Deferred offering costs
Incremental costs directly attributable to a planned offering of securities may be deferred and recorded as reduction to equity rather than an expense. OCA staff shared an example of a fact pattern in which they objected to deferring costs related to the initial preparation and audit of financial statements for an initial public offering. The staff concluded the costs were not directly attributable to the planned offering because audited financial statements could have various uses.
Investment company accounting
OCA staff discussed consultations related to whether certain funds that invest in non-financial assets meet the criteria to apply investment company accounting guidance in ASC 946, Financial Services – Investment Companies. A recent fact pattern involved an investment adviser that held an investment in a fund that invests in real estate (a nonfinancial asset). The adviser had also established several wholly owned subsidiaries that provided development, construction, and property management services to the underlying investment properties of the fund in exchange for compensation. Additionally, the investment adviser provided a guarantee to a third-party investor in the fund to limit their downside exposure to risks that might arise from its investment in the fund. The staff objected to a conclusion that the real estate fund met the definition of an investment company under ASC 946, noting that the substantive activities of the fund were not limited to investing funds for capital appreciation or investment income.
SEC reporting
CF staff highlighted recent SEC rulemaking, year-end financial reporting reminders, and areas of focus in financial statement reviews.
Recent SEC rulemaking
The SEC’s recent rulemaking activity was discussed by participants throughout the Conference. In his comments, former Commissioner Elad Roisman highlighted the significant quantity of rulemaking since SEC Chair Gary Gensler took office and encouraged participants to pay close attention to the SEC’s rulemaking agenda.
Clawback rules
Discussion about the recently effective clawback rules focused on the new cover page disclosures, which include two “checkbox” disclosures. Division of Corporation Finance Chief Accountant Lindsay McCord clarified that the first checkbox should be selected when there is both (1) an “accounting error” as defined in GAAP and (2) a change to prior year financial statements (which includes footnote disclosures) in the filing to correct the error in the historical period. CF staff reaffirmed that the second checkbox indicates whether there are any restatements to the prior year financial statements that required a clawback recovery analysis. McCord reiterated that since out-of-period adjustments do not impact the historical period, there are no checkbox disclosures required. For more background on the clawback rules, see our In depth, SEC adopts executive incentive compensation clawback rules.
Cybersecurity
Several speakers at the Conference commented on the SEC’s new cybersecurity rule. Division of Corporation Finance Director Erik Gerding highlighted key changes from the proposal that arose from stakeholder feedback. Gerding, as well as other speakers, reiterated the importance of cross-functional engagement in complying with the rule, including in connection with assessing materiality of cybersecurity incidents and drafting risk management and governance disclosures. For more background on the cybersecurity rule, see our In brief, SEC adopts cybersecurity disclosure rules. For insights on assessing materiality, refer to our publication, Making materiality judgments in cybersecurity incident reporting. And for other insights on the new rule, refer to our landing page.
Pay versus performance disclosures
CF staff noted that their reviews of pay versus performance disclosures in the first year of implementation focused on “good faith efforts” to apply the guidance. They noted that they have received many inquiries on the requirements and pointed to the Compliance and Disclosure Interpretations in Section 128D, which address frequently asked questions. For more background on the disclosure rules, see our In brief, SEC adopts pay versus performance disclosure rules.
Share repurchase disclosures
CF staff did not provide any updates with respect to the share repurchase rules that were adopted in May 2023 other than to highlight the order issued in November that postpones the effective date of the rule pending further Commission action. For more information, see our In brief, SEC postpones effective date of share repurchase disclosure rule.
Disclosure reminders and comment letter trends
CF staff shared comment letter trends and best practices when a registrant is responding to a comment letter. CF staff reminded participants that it looks at all information available in the public domain when reviewing filings, including analyst reports, earnings transcripts, statements by directors and officers, and social media. Refer to PwC’s summary of the comment letter process and listen to our podcast series on 2023 SEC comment letter trends for further information.
Non-GAAP measures
Non-GAAP measures continue to be one of the most frequent topics addressed in comment letters. CF staff observed that analysts and investors appear to increasingly rely on non-GAAP measures and there is no comprehensive basis of accounting for these measures, which suggests they are less reliable and may be inconsistently prepared. CF staff highlighted two areas of their Compliance and Disclosure Interpretations that were updated in December 2022, focusing on (1) adjustments related to normal, recurring, cash operating expenses and (2) individually tailored accounting principles. They emphasized that the examples provided in the interpretative guidance are not all-inclusive. For more on non-GAAP measures and the staff’s interpretive guidance, see our In depth, To GAAP or to non-GAAP.
Management’s Discussion and Analysis (MD&A)
Disclosures in the MD&A about risks, uncertainties, and material trends are critical to helping an investor understand how future results may depart from current financial statements, particularly in periods of rapid change. SEC staff observed that MD&A discussions should be an analysis and not just a repetition of the financial statements. Further, disclosures should be tailored to a company’s particular circumstances and “boilerplate” language should be avoided.
CF staff highlighted that disclosures of critical accounting estimates (CAEs) should not repeat accounting policy disclosures in the footnotes. Disclosures of CAEs should enable investors to understand material changes in estimates and the impact the estimate has had or is reasonably likely to have on financial condition or results of operations. The staff outlined the following considerations:
- Can an investor understand from the disclosure why the estimate is critical?
- Does the disclosure include both quantitative and qualitative disclosures?
- Is it likely that an investor would find it difficult to understand estimate uncertainty in the absence of quantification?
- Does the disclosure provide incremental information to accounting policy disclosures in the footnotes?
- Can an investor understand past variability in the estimate and assumptions?
- Does the disclosure address the qualitative and quantitative sensitivity of the reported amount to the method and assumptions underlying its calculation?
Quantitative and qualitative market risk disclosures
Given the current interest rate environment and recent challenges in the banking sector, CF staff emphasized the need to revisit S-K Item 305 disclosures about quantitative and qualitative market risk and consider updates to the disclosure of models, underlying assumptions, and sensitivity analyses. CF staff also noted that these disclosures may be relevant to registrants across industries, not just the banking sector.
Inventory
CF staff highlighted inventory as an area where they have observed inadequate disclosure given the current environment and media coverage of issues related to inventory. The staff reminded registrants experiencing inventory losses or shrinkage to consider relevant disclosures in the footnotes, MD&A, and/or risk factors.
Disclosures about recently issued accounting standards
CF staff provided reminders about the disclosures required by SAB Topic 11.M (ASC 250-10-S99-5) regarding the impact of recently issued accounting standards, which are commonly referred to as “SAB 74” disclosures. The staff noted that if a registrant cannot reasonably estimate the expected financial impact of a new standard, that fact should be disclosed. In those situations, the staff would expect a qualitative description of the effect of the new accounting standard and a comparison to the registrant’s current accounting. Registrants should also disclose the status of the implementation process and any significant implementation issues or matters to be addressed.
Other SEC reporting topics
Significance tests (S-X 3-05)
CF staff provided reminders related to the significance tests required by S-X 3-05, reiterating the view shared in the June 2023 CAQ SEC Regulations Committee meeting (Section III.C) that aggregate worldwide market value is determined using the market value from a public market, including a foreign market if that is the market where the equity is traded. CF staff also clarified that registrants are not permitted to calculate worldwide market value using alternative valuation methods such as private valuations in anticipation of an IPO, enterprise value, or net asset value.
Foreign private issuer status change
CF staff discussed transition implications if a registrant no longer qualifies as a foreign private issuer (FPI) and shared guidance on two issues relating to loss of FPI status: quarterly information and EGC accommodations regarding accounting policy transition. For more information, see Issues III and VI in the May 2023 International Practices Task Force Highlights.
SEC enforcement
Representatives from the SEC’s Division of Enforcement discussed themes arising from cases brought by the Commission over the past year. Enforcement Director Gurbir Grewal and Chief Accountant Ryan Wolfe emphasized the importance of controls over disclosed information, noting that all information provided to investors, wherever it is provided, needs to be “correct and complete.”
Sustainability reporting
Speakers throughout the Conference highlighted sustainability reporting requirements that may impact companies, including the recent California legislation, the Corporate Sustainability Reporting Directive in the EU, and the standards issued by the ISSB. For more information and a comparison of these frameworks, refer to our In the loop, Navigating the ESG landscape. Regarding attestation of sustainability reporting, AICPA Chief Auditor Jennifer Burns noted that the AICPA is planning to issue an exposure draft for attestation standards focused on sustainability in late 2024.
SEC staff did not comment on the status of its rulemaking relating to climate or human capital disclosures. In his comments, former SEC Commissioner Elad Roisman provided his view that the climate rule will be finalized and highlighted the potential for legal challenge. However, he encouraged companies to consider readiness based on the proposed rules. Roisman observed that there is significant focus on what companies are saying on sustainability topics, such as climate and human capital, and urged companies to be “very careful in the words [they] choose,” because regulators, customers, and others will hold them accountable for those words.
FASB and IASB standard setting update
FASB Chair Rich Jones and FASB Technical Director Hillary Salo discussed the FASB’s stakeholder outreach and its impact on the FASB’s technical agenda. Jones indicated that the FASB plans to perform another agenda consultation in 2024. The FASB also announced changes to the FASB’s Emerging Issues Task Force (EITF) to be implemented next year. Going forward, EITF members will determine the EITF agenda and provide recommendations to the FASB in the form of an agenda request with a proposed solution. These changes are intended to facilitate more timely identification of emerging issues and potential solutions.
The FASB highlighted standards recently issued or expected to be issued this month on segment reporting, income tax disclosures, and accounting for crypto assets. The FASB also discussed certain of the ongoing projects on the FASB’s current agenda. Further information about the FASB’s current projects can be found on the FASB website.
IASB Vice Chair Linda Meson Hutter highlighted the mandate of the IASB to bring clarity, consistency, and transparency to capital market participants. She focused her remarks on the IASB’s standard setting updates, including the IASB’s project on primary financial statements, the postimplementation review of IFRS 15, Revenue from Contracts with Customers, and coordination between the IASB and the International Sustainability Standards Board.
PCAOB update
PCAOB Chair Erica Y. Williams provided opening remarks and then joined a panel that included all of the members of the Board. Board members observed that results for inspections of 2022 audits are not trending in the right direction and observed a decline in the average number of critical audit matters in audit opinions, which was not viewed as a positive development. During this panel and in other sessions, PCAOB representatives highlighted the PCAOB’s significant level of standard-setting and enforcement activity during 2023. The PCAOB’s proposal on noncompliance with laws and regulations (NOCLAR) was mentioned by multiple Conference participants; however, the PCAOB did not provide an update on the timing or content of a final rule.
To have a deeper discussion, contact:
| ||
For more PwC accounting and reporting content, visit us at viewpoint.pwc.com. On the go? Take our PwC accounting podcast series with you at the Viewpoint podcasts page or wherever you listen to your podcasts.
| ||
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Link copied
