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Journal Entry — Highlights Released of CAQ SEC Regulations Committee’s June 18, 2013, Meeting

Published on: Aug 27, 2013

The Center for Audit Quality (CAQ) posted to its Web site highlights of the June 18, 2013, CAQ SEC Regulations Committee joint meeting with the SEC staff. Below is a summary of noteworthy topics discussed at the meeting.

Cybersecurity Disclosure Reviews

The SEC staff discussed the Commission’s response to a letter from Senator John D. Rockefeller IV in which he expressed his belief that the SEC should expand disclosure requirements related to a registrant’s cybersecurity risks. In her response to the letter, SEC Chairman Mary Jo White discusses the staff’s cybersecurity guidance as well as its ongoing evaluation of registrants’ disclosures about cybersecurity risks and incidents. In addition, she has instructed the SEC staff to provide her with additional information and any recommendations on this topic. As with its remarks at the 2012 AICPA Conference,1 the SEC staff pointed registrants to the Commission’s October 2011 disclosure guidance,2 which remains unchanged. The staff reminded registrants that they must disclose material cybersecurity risks and material known cybersecurity incidents along with information that allows investors to understand a registrant’s cybersecurity risks; such information would include costs incurred for (1) responding to cybersecurity incidents and (2) enhancing the company’s protection against these risks. The staff also reminded registrants that they need to consider the impact of such incidents when evaluating their disclosure controls and procedures. 

Recently Issued Compliance and Disclosure Interpretations

The SEC staff clarified two recent Compliance and Disclosure Interpretations (C&DIs) issued in May 2013 — C&DI Questions 110.01 (on Exchange Act Form 8-K) and 106.01 (on the oil and gas rules). The staff emphasized that the interpretive guidance in each of these C&DIs was developed to address specific questions from registrants but that they (1) do not change existing guidance and (2) are not expected to change current practice. For additional information about the guidance in the C&DIs, see Deloitte’s June 3, 2013, journal entry.

JOBS Act Update

While the SEC staff indicated that it will continue to assess JOBS Act questions it receives when determining aspects of the act on which to develop future guidance, the staff highlighted that it has issued several FAQs answering all open questions on the act that are generally applicable. In addition, the staff noted that it continues to make progress on its Regulation S-K study and intends to complete it “as soon as reasonably possible.”

Advisory Committee on Small and Emerging Companies

An SEC staff member gave an update on activities related to the May 2013 meeting of the SEC Advisory Committee on Small and Emerging Businesses, noting that the staff and committee are currently assessing various recommendations. The staff also noted that the committee’s current charter expires in October 2013 and that the SEC will need to decide whether to extend it. 

Questions About Rules Related to Conflict Minerals and Extractive Issuer Payments

The SEC staff indicated that it has issued FAQs addressing implementation-related questions about its final rules on conflict minerals3 and payments by extractive issuers.4 (See Deloitte’s May 31, 2013, journal entry for additional information.) The staff also noted that it continues to assess a number of open questions about the conflict minerals rule and that it has responded to all open questions about the rule on resource extraction issuers.

Editor’s Note: On July 2, 2013, the U.S. District Court for the District of Columbia vacated the SEC final rule that would have required resource extraction issuers5 to disclose certain payments. The court's ruling eliminates the requirement for resource extraction issuers to disclose certain payments made to foreign governments, which would have been effective for issuers with fiscal years ending after September 30, 2013. 

In contrast, on July 24, 2013, the district court upheld the SEC´s final rule on conflict minerals by rejecting a lawsuit filed by the U.S. Chamber of Commerce, the Business Roundtable, and the National Association of Manufacturers. As a result of the court´s decision, the final rule continues to be effective on a calendar-year basis beginning this year. A registrant that meets the final rule´s reporting requirements must file a Form SD with the SEC by May 31, 2014.

Considerations Related to Revised COSO Framework Transition

In connection with the issuance of COSO’s 2013 framework6 (revised framework) in May 2013, Paul Beswick, chief accountant in the SEC’s Office of the Chief Accountant, recently gave a speech in which he indicated his expectation that the Commission will receive questions about the revised COSO framework’s transition and implementation. The staff noted that it will continue to monitor registrants’ transition to the revised framework and consider the need for additional disclosures. Registrants were urged to consider the transition information on COSO’s Web site.

Financial Disclosure Roundtable Timing

The SEC staff gave an update on the timing of the financial disclosure roundtable it has planned to obtain feedback from participants on which information should be included in a registrant’s financial statements compared with other sections of the registrant’s periodic filing or registration statement (e.g., MD&A). The staff noted that it has not yet decided on a date for the roundtable.

Pro Forma Information Requirements for Smaller Reporting Companies Reporting a Significant Disposition

Regulation S-X, Rule 8-01,7 permits smaller reporting companies (SRCs) to consider Regulation S-X, Rule 11-01,8 when preparing, presenting, and disclosing pro forma financial information. The SEC staff indicated that the nature and extent of an SRC’s pro forma information to reflect a significant disposition depend on the SRC’s specific facts and circumstances. While the Rule 11-01 significance thresholds applicable to larger reporting companies may be appropriate to an SRC’s determination, the staff observed that this is not always the case and that an SRC may need to assess what would be material to its investors.

Impact of New Revenue Recognition Standard on Other Disclosures

The SEC staff and committee members discussed the new FASB and IASB revenue recognition standards that the boards expect to issue later this year (and that would be effective as of January 1, 2017). The staff emphasized its expectation that registrants disclose the transition method they plan to apply (i.e., either a modified retrospective approach or a full retrospective approach). Further, registrants would most likely be required to provide the following disclosures about the new standard once it is finalized and implemented:

  • SAB Topic 11.M9 (SAB 74) disclosures.
  • MD&A disclosures about the effect of the modified retrospective transition method on comparative periods (if this method is selected).
  • Presentation of information within the table of five-year selected financial data. 

Because the new revenue recognition standard will have a pervasive effect on all registrants, the SEC staff has begun thinking about questions that registrants might ask.

 

Retrospective Adoption of New Accounting Standard During an Interim Period and Application of Rule 3-09 in a Registration Statement During That Period

The committee asked the SEC staff whether the guidance in Section 2410.8 of the SEC Financial Reporting Manual (FRM),10 which addresses the need to reassess significance thresholds for equity method investments under Regulation S-X, Rule 3-09, after discontinued operations are reported, could also be applied to the retrospective application of a new accounting standard. The committee highlighted certain points to consider, including the following:

  • Reassessments of the significance threshold calculations might cause the equity method investment to become significant when it was not previously and vice versa.
  • It could become difficult to obtain audited financial statements of equity method investees when no previous expectation existed that an investee would be significant.
  • The numerator and denominator in the significance calculation could change.

The staff noted that it will consider the points discussed and whether to provide additional guidance.

____________________

1 The 2012 AICPA National Conference on Current SEC and PCAOB Developments. See Deloitte’s December 11, 2012, Heads Up for additional information.

2 CF Disclosure Guidance Topic No. 2, Cybersecurity.

3 See Deloitte’s September 11, 2012, Heads Up for additional information.

4 See Deloitte’s September 27, 2012, Heads Up for additional information.

5 The final rule defines resource extraction issuers (or “extractive issuers”) as issuers that are (1) “engaged in the commercial development of oil, natural gas, or minerals” and (2) “required to file an annual report with the [SEC].” Domestic issuers (including smaller reporting companies), foreign issuers, their subsidiaries, and other entities controlled by such extractive issuers would have been subject to the final rule’s disclosure requirements.

6 In May 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released its updated Internal Control Framework.

7 Regulation S-X, Article 8, “Financial Statements of Smaller Reporting Companies.”

8 Regulation S-X, Article 11, “Pro Forma Financial Information.”

9 SEC Staff Accounting Bulletin (SAB) Topic 11.M, “Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant.”

10 As indicated in the CAQ meeting highlights, FRM Section 2410.8 provides guidance on determining the “significance of equity method investees after a discontinued operation has been reflected in a registrant’s financial statements” to comply with SEC Regulation S-X, Rule 3-09, “Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons.”

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