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August 2018

Capital Formation: The SEC’s Upcoming “Concept Release”

Aug 29, 2018

On August 29, 2018, the Securities and Exchange Commission (SEC) released a speech by SEC Chair Jay Clayton, who noted that a concept release on capital formation is on the way.

The main topic was the plan to revisit the thresholds that trigger the SOX 404(b) requirement to provide an auditor attestation report on internal control over financial reporting. One thing is pretty clear from this speech: odds are excellent that relief from SOX 404(b) is in the offing for more small companies.

Review the full speech on the SEC's website and articles from Cooley PubCo and the Wall Street Journal.

Carefully drafted risk factors in SEC filings are good insurance

Aug 20, 2018

On August 20, 2018, Merrill Corporation released an article on how the federal securities laws give a public company the opportunity to create, in effect, an in-house liability insurance policy.

A carefully fashioned Risk Factors section in the Form 10-K serves as a key component of that assurance. Proper disclosure of risk factors can provide powerful protection against a suit alleging securities fraud as well as improve investor relations.

Developing disclosure entails two steps: 1) identify and prioritize the risks; and 2) draft the actual disclosures. The corporate infrastructure needed to identify a risk already exists.

Review the full article on Merrill Corporation's website.

Comp Committees take note: stock buybacks as a mechanism for manipulation

Aug 16, 2018

On August 16, 2018, Cooley LLP published an article on how companies are spending much of their savings from the 2017 Tax Cuts and Jobs Act on stock buybacks.

A common rationale for conducting a stock buyback is that the shares are undervalued—thus signaling optimism about the company’s future. In addition, buybacks are often viewed as a useful way to provide shareholders with a cash distribution or to offset dilution.

However, in some cases, the author of the study contends, the real motivation may be more opportunistic—managing EPS and increasing executive compensation, regardless of the operational success of the company, where EPS is a performance measure.  Compensation committees should take note.

Review the full article on Cooley LLP's website.

FASB clarifies guidance on cloud computing arrangements

Aug 29, 2018

On August 29, 2018, the Financial Accounting Standards Board (FASB) issued a new standard that is designed to reduce complexity for the accounting for costs of implementing a cloud computing service arrangement.

The ASU clarifies certain aspects of ASU 2015-05Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which was issued in April 2015. Specifically, ASU 2018-15 “align[s] the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).” The ASU does not affect the accounting for the service element of a hosting arrangement that is a service contract.

Review the press release and ASU on the FASB’s website.

FASB issues guidance to improve disclosures in notes to financial statements

Aug 29, 2018

In August 2018, the Financial Accounting Standards Board (FASB) issued two Accounting Standards Updates (ASUs) and two changes to its conceptual framework that are intended to improve the effectiveness of disclosures in notes to financial statements.

FASB releases

Specifically, the FASB released the following:

  • ASU 2018-13, Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement — Removes, modifies, and adds certain disclosure requirements in ASC 820 on the basis of the concepts in the FASB Concepts Statement Conceptual Framework for Financial Reporting — Chapter 8: Notes to Financial Statements. The ASU is effective for all organizations for fiscal years — and interim periods within those fiscal years — beginning after December 15, 2019. Early adoption is permitted.
  • ASU 2018-14, Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans — Modifies ASC 715-20 to improve disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The ASU is effective for fiscal years ending after December 15, 2020, for public companies and for fiscal years ending after December 15, 2021, for all other organizations. Early adoption is permitted.
  • Chapter 8 of the conceptual framework, “Notes to Financial Statements” — “Explains what information the Board should consider including in notes to financial statements by describing the purpose of notes, the nature of appropriate content, and general limitations. It also addresses the Board’s considerations specific to interim reporting disclosure requirements.”
  • Amendments to chapter 3 of the conceptual framework, “Qualitative Characteristics of Useful Financial Information” — Updates the FASB’s definition of materiality to be consistent with the definition used by the SEC, PCAOB, AICPA, and U.S. judicial system.

Review the press release and FASB in Focus newsletter on the FASB’s website.

 

Comparison with IFRS

The International Accounting Standards Board (IASB) is still deliberating its Discussion Paper Principles of Disclosures that was published in March 2017. In July 2018, the IASB selected IAS 19, Employee Benefits and IFRS 13, Fair Value Measurement for the targeted standards-level review of disclosures.

The FASB had already published its proposed Statement on Notes/Disclosures in 2014 and had also picked employee benefits and fair value measurement to test the concepts of the proposed Concepts Statement. This has now resulted in corresponding changes in Subtopic 715-20 and Topic 820. In selecting IAS 19 and IFRS 13, the IASB is therefore following the same path as the FASB.

 

FASB issues insurance accounting standard

Aug 15, 2018

On August 15, 2018, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that improves financial reporting for insurance companies that issue long-duration contracts, such as life insurance, disability income, long-term care, and annuities.

The new standard requires updated assumptions for liability measurement. The assumptions used to measure the liability for traditional insurance contracts, which are usually determined at contract inception, will now be reviewed—and, if there is a change, updated—at least annually, with the effect recorded in net income.

Review the press release and the ASU on the FASB's website.

FASB staff proposes taxonomy improvements and implementation guide

Aug 31, 2018

In August 2018, the Financial Accounting Standards Board (FASB) staff issued proposed improvements related to the U.S. GAAP Financial Reporting Taxonomy.

Specifically, the staff proposed taxonomy enhancements related to (1) Accounting Standards Update (ASU) No. 2018-13, Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, and (2) the proposed ASU, Codification Improvements to Topic 326, Financial Instruments — Credit Losses. In addition, the staff has issued a proposed taxonomy implementation guide, Insurance, Long-Duration Contracts.

Comments on the proposed taxonomy improvements related to fair value measurement disclosures are due by September 27, 2018.

Comments on the proposed taxonomy improvements related to the proposed ASU on credit losses are due by September 19, 2018.

Comments on the proposed implementation guide are due by October 16, 2018.

Global Reporting Initiative and the United Nations Global Compact release Practical Guide on integrating the Sustainable Development Goals into corporate reporting

Aug 01, 2018

On August 1, 2018, the Global Reporting Initiative (GRI) and United Nations Global Compact (UNGC) released a Practical Guide on integrating the Sustainable Development Goals (SDGs) into corporate reporting. The guide is intended to help companies of all sizes to prioritise their SDG targets, take action and report on progress.

Endorsed by all 193 United Nations Member States in 2015, the 2030 Agenda and its Sustainable Development Goals focus global efforts and attention on 17 pressing issues. The SDGs are becoming increasingly important for governments, investors and businesses, as they are "an articulation of the world’s most pressing environmental, social and economic issues and, as such, act as a definitive list of the material ESG (environmental, social and governance) perspectives that should be taken into account as part of an investor’s fiduciary duty".

The practical guide outlines a three step process to embed SDGs into existing business and reporting processes. The guide highlights that the recent GRI publication, Business Reporting on the SDGs: An Analysis of the Goals and Targets, should also be used as part of a company’s regular reporting cycle.

The three steps, outlined for companies, in the guide are as follows:

  1. Define priority SDG targets – including understanding the SDGs and their associated targets, conducting principled prioritisation of SDG targets and defining SDG-related report content. This step is focussed on determining which SDG targets should be prioritised based on an assessment of risks and benefits to people and the environment. 
  2. Measure and analyse – including setting business objectives, selecting appropriate disclosures and collecting and analysing data. The purpose of this step is to identify and align objectives and strategies to contribute to priority SDG targets.
  3. Report, integrate and implement change – including consideration of good practice reporting, consideration of data users’ information needs and reporting and implementing change. This step is focused on setting out what is needed for putting together the content of the external report and reflecting internally on implementing change.

The guide should be used together with other relevant tools released by GRI, the UN Global Compact and their partners, in particular Business Reporting on the SDGs: An Analysis of the Goals and Targets, In Focus: Addressing Investors Needs in Business Reporting on the SDGs and the SDG Compass.

The Financial Reporting Council (FRC) recently referred to the UN Sustainable Development Goals in their Guidance on Board Effectiveness report when stating voluntary frameworks that boards may wish to refer to in identifying social and environmental considerations in their company strategies.

Review the press release and full practical guide can be found on the GRI’s website.

IASB releases fifth webcast on FICE DP

Aug 13, 2018

On August 13, 2018, the International Accounting Standards Board (the Board) released its fifth webcast in a series of web presentations related to Discussion Paper, “Financial Instruments With Characteristics of Equity.”

This webcast discusses the Board’s preferred approach to presenting equity instruments.

The next and final webcast in the series will cover the pre­sen­ta­tion of financial li­a­bil­i­ties.

For more in­for­ma­tion, see the press release on the Board’s website.

IASB® Chairman discusses Japan and IFRS® Standards

Aug 29, 2018

On August 29, 2018, the International Accounting Standards Board (IASB) released a speech by IASB Chairman Hans Hoogervorst, given at an event hosted by the Accounting Standards Board of Japan (ASBJ) in Tokyo. His speech, entitled "Japan and IFRS Standards" covered (1) key takeaways from Japan's approach to IFRS Standards, (2) accounting for goodwill, and (3) the IASB's better communication project.

Mr. Hoogervorst began by discussing progress towards global accounting standards and reflected on Japan's "very interesting economic experiment" of letting the market decide whether to adopt IFRS. He noted:

[A]round 200 mostly big, multinational Japanese companies have chosen to adopt full IFRS Standards, representing more than 30% of the total market capitalisation of the Tokyo Stock Exchange. . . . The number of Japanese companies using US GAAP has been steadily shrinking and is expected to be less than 10 soon.

Mr. Hoogervorst went on to discuss the reason the IASB changed its mind and decided to possibly reintroduce amortization of goodwill in an upcoming discussion paper. (The IASB has not listed an expected date for this DP in its work plan.) He noted that the post-implementation review of IFRS 3 identified "a couple of problems" with the impairment-only approach to goodwill:

[T]he annual impairment test is both costly and subjective. Often, the projections of future cash flows from cash generating units tend to be on the rosy side. Impairment losses therefore tend to be identified too late. And when an impairment loss is finally booked, the resulting information has only weak confirmatory value for investors.

After the discussion of goodwill, Mr. Hoogervorst described the IASB's better communication project, promising to "improve what we have, rather than create big, new Standards." He underscored that upcoming projects will improve financial reporting at "much less cost" because the focus will be on presenting better information that is already being collected. He then detailed aspects of the "strands of work" that fall under the umbrella of better communications, including primary financial statements and management commentary. 

Review the full version of Mr. Hoogervorst's speech on the IASB's website.

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