SEC: Companies Should Disclose the Effects of New Accounting Standards

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By Denise Lugo

Nov. 3 — Review teams in the Securities and Exchange Commission’s Division of Corporation Finance will scrutinize companies’ financial reporting--specifically 10-Ks--to see if they include disclosures about the probable outcomes of applying new accounting rules on revenue, credit losses and leases, the division’s top accountant said.

“The review teams, I think, will be paying very close attention in this next 10-K season to these disclosure, and I don’t think that we will be shy about issuing comments if we don’t see the disclosures,” Corp Fin Chief Accountant Mark Kronforst said during a Practicing Law Institute panel discussion Nov. 2.

Applies to Three Big Accounting Standards

The disclosures, relevant to updated requirements under SEC Staff Accounting Bulletin No. 74, would provide--according to the commission--useful information to analysts and investors because they would enable companies to anticipate the consequences that the new accounting standards will have on companies’ financial reports.

The disclosures specifically apply to three new accounting standards:

  •  Revenue from Contracts with Customers (ASC 606);
  •  Leases (ASC 842);, and
  •  Financial Instruments—Credit Losses (ASC 326).
Issued in May 2014, the rules on revenue are effective in 2018 but can be applied next year. Rules for both leases and credit losses were issued earlier this year and take effect 2019 and 2020, respectively.

Prepare Controls for Content

SAB 74 informs users that a company will be a required to adopt a new standard. An update of that disclosure rule was announced in September by senior SEC staff at a meeting of the Financial Accounting Standards Board’s task force unit.

Consistent with SAB 74, the update says if a company doesn’t know or can’t reasonably estimate the impact that adoption of a standard is expected to have on their financial statements, they should make a statement to that effect.

That revelation should appear within footnote disclosures, and companies should have controls over the preparation of that content, SEC acting chief accountant Wesley Bricker told the conference.

“So for some companies that have it done boilerplate year-after-year-after-year—perhaps they didn’t have a well-designed control over the identification of relevant information for inclusion—we would expect that the controls be refreshed to ensure that the appropriate content is provided in those footnotes,” Bricker said.

Heavy Regulatory Scrutiny

The topic, part of panel discussions spotlighting accounting and reporting issues, provides insight into the heavy scrutiny regulators are placing on the state of implementation among companies for what some practitioners refer to as the biggest accounting overhaul in decades.

SAB 74 requires disclosure about the likely financial effect of applying a standard that is effective at a future point in time and the update piggybacks on that, according to the discussions.

“The update is to reinforce not only that quantification concept, but also a qualitative aspect of that disclosure,” Bricker said. “And the qualitative aspects—even if you haven’t reached a final measure of the anticipated effect—a number of companies are still in their assessment phase. So even in absence of a quantified amount, there is still good information that investors should know about the state of the implementation.”

Disclosure content should include qualitative disclosures describing the effect of the accounting policies the company expects to apply, if it can determine them, panel discussions indicated. Also included would be any other additional information—quantifications that might be needed for an investor to understand the company’s progress in implementing the standards.

Lawyers get Companies Clued in

The disclosures are among financial reporting areas lawyers should keep on their radar, other panelists said. Lawyers should pay attention to the disclosures as they review companies’ 10-Ks, said John White, a partner at Cravath, Swane & Moore LLP in New York and chair of its corporate governance and board advisory practice.

“So if you look at last year’s 10-K, you’re going to see this footnote that said ‘rev rec is coming’ and there’ll be a warning paragraph describing what the new standard is going to look like, and the last sentence almost inevitably said ‘we’re clueless as to the effect on our company,’” White said. “This year you can’t say ‘we’re clueless’ —it may not be a great idea to say ‘we’re clueless.’”

To contact the reporter on this story: Denise Lugo in New York at dlugo@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

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