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May 5 — Overly aggressive interpretations of impending revenue recognition accounting rules and a heavy reliance on auditors to interpret forthcoming credit impairment rules will encounter criticism from the Securities and Exchange Commission, an SEC accountant warned May 5.
“The SEC staff will continue to respect well-reasoned, practical judgments when those judgments are grounded in the principles of the standard and considered the utility of the resulting information to investors,” SEC Deputy Chief Accountant Wesley Bricker told a Baruch College accounting conference.“Conversely, aggressive interpretations that appear to be taken to achieve a specific outcome, such as preserving existing reporting, will not be well received, particularly when that outcome is inconsistent with the principles of the new standard,” Bricker said.
On the impending impairment standard, Bricker cautioned companies against looking to their independent auditors to help figure out what processes will be warranted to implement the new rules.
“I have already heard some suggestions that management will need to look to their auditor to determine what processes are required,” he said. “I find these suggestions troubling” because managers should turn to the accounting standard, books and records and internal control requirements to make their determinations, he added.
The preferable course Bricker outlined would “help avoid the perception that auditors are directing management's processes through the audit, which of course could lead to other questions around internal controls or auditor independence.”
The impairment rules, which govern loan and other credit loss reporting, are to be effective for public companies in 2020.
The revenue standard, issued jointly with similarly worded rules by the International Accounting Standards Board, will affect virtually every significant commercial enterprise around the world. In 2014, the S&P 1500 companies, which account for about 90 percent of the U.S. market capitalization, recorded a sum total of more than $12.8 trillion in their financial statements, Bricker said.
FASB's planned rules on credit impairment, to be issued in June, are forecast to have deep impacts on banks' and credit unions' earnings. Loan losses and parallel reserves for them are expected to increase dramatically at many financial institutions.
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The text of Bricker's speech is available at https://www.sec.gov/news/speech/speech-bricker-05-05-16.html.
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