In two separate venues this week, the SEC staff reminded registrants about best practices to follow in the periods leading up to the adoption of ASU 2014-09¹ (the “revenue ASU”), ASU 2016-02² (the “lease ASU”), and ASU 2016-13³ (the “credit loss ASU”). The staff’s comments, which reiterated themes it has addressed over the past year, focused on internal controls over financial reporting, auditor independence, and disclosures related to implementation activities.

Internal Controls Over Financial Reporting

In a speech at the 2016 AICPA National Conference on Banks & Savings Institutions on September 21, 2016, SEC Interim Chief Accountant Wesley R. Bricker remarked that as registrants develop plans for the transition to the credit loss ASU, they should assess the adequacy of their current internal controls “to reasonably assure the reliability of the financial information reported by management.” Recognizing that management may need to exercise greater judgment when applying the guidance in the credit loss ASU than it does under existing GAAP, Mr. Bricker observed that the objective of reassessing the adequacy of a registrant’s current internal controls now is to identify and implement any changes to these controls that may be warranted “to support the formation and enforcement of sound judgments” under the new standard.

Editor’s Note Regulation S-K, Item 308(c),4 requires registrants to disclose any material changes in their ICFR in a Form 10-Q or Form 10-K. Accordingly, registrants will need to be mindful of these disclosure requirements when establishing new controls and processes related to the adoption of new accounting standards.

Maintaining Auditor Independence

Mr. Bricker also touched on how an active dialogue between management and auditors — particularly regarding the implementation of new accounting standards and the accounting for complex transactions — can (1) benefit financial reporting and audit quality and (2) pose challenges to maintaining auditor independence. In his remarks, Mr. Bricker observed that “[a]s long as management, and not the auditor, makes the final determination based upon its own analysis as to the accounting used, including determination of estimates and assumptions, and the auditor does not design or implement accounting policies, such auditor involvement as an input to management’s process can be appropriate.”

While Mr. Bricker’s comments concerned the adoption of the credit loss ASU, we observe that his remarks would apply equally to implementation activities related to the adoption of the revenue and lease ASUs.

Disclosures Related to Implementation Activities

At the September 22, 2016, EITF meeting, SEC Assistant Deputy Chief Accountant Jenifer Minke-Girard made an announcement (the “staff announcement”) regarding SAB Topic 11.M.⁵ Ms. Minke-Girard indicated that when a registrant is unable to reasonably estimate the impact of adopting the revenue, lease, or credit loss ASU, the registrant should consider providing additional qualitative disclosures about the significance of the impact on its financial statements. She further noted that the SEC staff would expect such disclosures to include a description of:

• The effect of any accounting policies that the registrant expects to select upon adopting the ASU(s).
• How such policies may differ from the registrant’s current accounting policies.
• The status of the registrant’s implementation process and the nature of any significant implementation matters that have not yet been addressed.

Editor’s Note Ms. Minke-Girard observed that while it would be beneficial for calendar-year-end registrants to include such disclosures in their upcoming quarterly filings, the SEC staff’s objective in making this statement at the September EITF meeting was to give such registrants sufficient time to consider the staff announcement before their year-end financial reporting. She also noted that SAB Topic 11.M applies to foreign private issuers that use IFRSs. Recognizing that IFRS filers may not monitor EITF meetings, the SEC staff will consider clarifying its expectations for such filers in additional communications. This discussion of the staff announcement is based on our observations at the EITF meeting. Readers can refer to the staff announcement, which will be available in the EITF meeting minutes once they are published.

Because the revenue ASU’s adoption date is earlier than the adoption date of the lease or credit loss ASU, we suspect that many registrants have progressed further with their implementation efforts related to the revenue ASU. Accordingly, the appendix of this Financial Reporting Alert includes an excerpt from our forthcoming A Roadmap to Applying the New Revenue Recognition Standard that contains considerations related to this topic, including examples of disclosures that a registrant adopting the revenue ASU may provide, depending on its individual facts and circumstances. Registrants that expect to be significantly affected by the adoption of the lease ASU or credit loss ASU should consider whether they may need to provide similar disclosures that are tailored to the provisions of the respective ASU.

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