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ACCOUNTING AND SEC HEADLINES:
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A Closer Look – New Edition of A Closer Look Provides Update on ESG and Integrated Reporting
We have published a new edition of
A Closer Look: ESG and Integrated Reporting Update. This new edition provides an update on regulatory activities related to ESG reporting and the closely linked integrated or sustainability reporting.
Rule 10b5-1 Plans – SEC Chair Gensler Directs Staff to Consider Updates to Executive Stock Ownership Rules
SEC Chair Gary Gensler recently spoke at the
CFO Network Summit. During this conference, Gensler was asked about his thoughts on executive stock ownership rules, including Rule 10b5-1 which provides affirmative defenses for corporate insiders and companies to buy and sell stock as long as they have adopted trading plans in good faith.
Gensler indicated that in his view Rule 10b5-1 plans “have led to real cracks in our insider trading regime. Thus, I’ve asked staff to make recommendations for the Commission’s consideration on how we might freshen up Rule 10b5-1.” Specifically, Gensler believes potential changes to Rule 10b5-1 should address:
- Rule changes that would provide a required cooling off period before insiders or companies make their first trade after adopting 10b5-1 plans should be considered.
- Limits on when 10b5-1 plans can be canceled should be addressed.
- More disclosure regarding the adoption, modification, and terms of Rule 10b5-1 plans by individuals and companies could enhance confidence in our markets.
- Whether there should be limits on the number of 10b5-1 plans that insiders can adopt.
In addition to these considerations, Gensler has directed the SEC staff to consider other reforms to Rule 10b5-1, including the intersection with share buybacks.
Modifications of Equity-Classified Warrants – New Edition of GAAP Update Service Discusses Modification of Equity-Classified Warrants
We have published a new edition of the GAAP Update Service,
Modifications of Equity-Classified Warrants. This new edition discusses FASB Accounting Standards Update (ASU) No. 2021-04,
Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity Classified Written Call Options. Freestanding written call options (such as warrants) are sometimes issued to enhance the marketability of a company’s debt or common stock offering. Some of these warrants are classified as equity in the issuer’s financial statements but are not accounted for as either stock compensation or derivatives.
US GAAP does not address how the issuer should account for modifications of these instruments. The FASB has approved an EITF consensus to fill that void. Under the new guidance, if the modification does not change the instrument’s classification as equity, the company that issued the warrants accounts for the modification as an exchange of the original instrument for a new instrument. In general, if the fair value of the ‘new’ instrument is greater than the fair value of the ‘original’ instrument, the excess is recognized based on the substance of the transaction, as if the issuer had paid cash.
Conceptual Framework – FASB Discusses Feedback Received on Liability Definitions
As reported in its “Summary of Board Decisions” publication, the FASB met on June 2, 2021 and discussed the feedback from comment letter respondents on issues related to the liability definition and the term control in the asset definition in the proposed FASB Concepts Statement No. 8,
Conceptual Framework for Financial Reporting—Chapter 4, Elements of Financial Statements. Among other things, the FASB decided to:
Definition of a Liability
The FASB decided to remove the terms probable and future and the phrase past transactions or events from the current liability definition.
Distinguishing between Liabilities and Equity
The FASB reaffirmed the decision that an obligation that requires an entity to transfer or otherwise provide economic benefits to others should meet the definition of a liability. The FASB also decided to improve the discussion of distinguishing between liabilities and equity in the drafting process, but not include examples illustrating the application of the definition to specific instruments and not change the discussion on an obligation to transfer a variable number of shares being a liability.
Business Risks, Constructive Obligations, and Stand-Ready Obligations
The FASB decided to not specifically address executory contracts, but add a paragraph stating that certain arrangements create rights and obligations, but that the circumstances under which the rights and obligations occur are so varied that when they should be recognized is inevitably a standards-level issue because recognition is so dependent upon those varying facts and circumstances. The FASB also decided to not address economic compulsion in the discussion on business risks and not to add the phrase little to no discretion and remove it from paragraph BC4.26.
The FASB also discussed additional feedback from comment letter respondents related to proposed Chapter 4 of Concepts Statement 8 at a future FASB meeting.
Proxy Voting Advice Rules – SEC’s Corporation Finance Issues Statement on Review of Proxy Voting Advice Rules
In connection with SEC Chair Gary Gensler’s previously issued statement on the review of proxy voting advice rules, Corp Fin has issued a
Statement on Compliance with the Commission’s 2019 Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice and Amended Rules 14a-1(1), 14a-2(b), 14a-9. This statement confirms that Corp Fin is considering whether to recommend that the SEC revisit the 2019 Interpretation and Guidance and the 2020 Rule Amendments. Corp Fin indicates that in light of this direction, it “has determined that it will not recommend enforcement action to the Commission based on the 2019 Interpretation and Guidance or the 2020 Rule Amendments during the period in which the Commission is considering further regulatory action in this area.”
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AUDITING AND INTERNAL CONTROLS HEADLINES:
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A Closer Look – New Edition of A Closer Look Provides Update on ESG and Integrated Reporting
As discussed above, we have published a new edition of
A Closer Look: ESG and Integrated Reporting Update. This new edition provides an update on regulatory activities related to ESG reporting and the closely linked integrated or sustainability reporting.
Preparation, Compilation, and Review Engagements – 2021-2022 Edition of Knowledge-Based Preparation, Compilation, and Review Engagements (Post-SSARS-25) Published
We have published the
2021-2022 Knowledge-BasedTM Preparation, Compilation, and Review Engagements. This toolset is designed to help the accountant efficiently and effectively perform financial statement preparation engagements, compilations, and reviews of nonpublic commercial entities in accordance with Statements on Standards for Accounting and Review Services (SSARS) issued by the Accounting and Review Services Committee (ARSC) of the American Institute of Certified Public Accountants (AICPA).
The tools in this edition of have been updated, where applicable, to take into account the latest literature, standards, and guidance applicable to preparation, compilation, and review engagements, including Statement on Standards for Accounting and Review Services (SSARS 25),
Materiality in a Review of Financial Statements and Adverse Conclusions; and the AICPA Guide
Preparation, Compilation and Review Engagements.
SSARS 25 is effective for engagements performed in accordance with SSARSs for periods ending on or after December 15, 2021. Early implementation is permitted. This edition fully implements the provisions of SSARS 25. If you do not wish to implement SSARS 25, the Pre-SSARS 25 edition of this toolset should be used.
External Information Sources – AICPA Issues SAS 144 on the Use of Specialists and Pricing Information Obtained from External Information Sources
The Auditing Standards Board (ASB) of the AICPA has issued the new standard, Statement on Auditing Standards (SAS) No. 144,
Amendments to AU-C Sections 501, 540, and 620 Related to the Use of Specialists and the Use of Pricing Information Obtained From External Information Sources.
The AICPA Chief Auditor, Jennifer Burns, CPA, explains the reasons for the development of SAS 144 in response to stakeholder feedback:
“We heard feedback that more guidance on auditing the fair value of financial instruments would be helpful. This new standard provides that and has a particular focus on the use of pricing services,” said Ms. Burns. “We’ve also taken the opportunity to modernize our standards on management’s and auditors’ use of specialists, which is becoming more common due to the growing complexity of today’s financial reporting.”
What SAS 144 Does
SAS 144 amends SAS No. 143,
Auditing Accounting Estimates and Related Disclosures (AU-C Section 540 in AICPA
Professional Standards) and other standards, including SAS No. 122,
Clarification and Recodification, Sections 501 and 620.
The primary amendments affect the following AU-C Sections:
- AU-C Section 501, Audit Evidence — Specific Considerations for Selected Items (AICPA, Professional Standards);
- AU-C Section 540, Auditing Accounting Estimates and Related Disclosures (AICPA, Professional Standards); and
- AU-C Section 620, Using the Work of an Auditor’s Specialist (AICPA, Professional Standards);
These amendments include guidance on:
- Application of SAS 143 when management has used the work of a specialist in developing accounting estimates;
- Evaluating estimates related to the fair value of financial instruments using a new appendix to AU-C Section 500, Audit Evidence; and
- Using the work of an auditor’s specialist.
Effective Date
SAS 144 will be effective for audits of financial statements for periods ending on or after December 15, 2023.
Employee Benefit Plans – AICPA Proposes Guidance for Application of Topic 606 for Employee Benefit Plans
The AICPA has issued the Exposure Draft,
Applicability of FASB ASC 606, Revenue from Contracts with Customers, to Employee Benefit Plans. The comment deadline is July 12, 2021.
When final, the text of the proposal will be included in the Audit and Accounting Guide:
Employee Benefit Plans.
Overall, the proposal includes draft guidance on applicability of the “principles of FASB Accounting Standards Codification™,
Revenue from Contracts with Customers, for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers.”
The draft includes proposed “Exhibit A-4, Employee Benefit Plan Income Streams - FASB ASC 606 Applicability.” Exhibit A-4 is a table that “includes examples of typical income streams (cash flow) streams in an employee benefit plan with considerations for FinREC’s determination of whether the income streams are subject to the guidance in FASB ASC 606. Such income streams include:
- Investment income, including dividends, interest and other typical forms of investment income;
- Discretionary and non-discretionary contributions to the plan;
- Revenue sharing;
- Tuition;
- Grants;
- Books and supplies;
- Administration/recordkeeping income;
- Lease/rental income; and
- Pharmacy rebates.
Review Engagements – New Edition of GAAS Update Service Discusses SSAE-22
We have published a new edition of the GAAS Update Service,
Practice Issues and Questions & Answers Relating to SSAE-22,
Review Engagements. SSAE-22 specifically provides performance and reporting requirements and application guidance for review engagements performed in accordance with the attestation standards and revises extant AT-C Section 210 for consistency with AT-C Section 205,
Assertion-Based Examination Engagements (pursuant to SSAE-21,
Direct Examination Engagements).
SSAE 22 was covered in great detail in the April 15, 2021, April 30, 2021, and May 15, 2021 GAAS Updates. This GAAS Update focuses on practical issues relating to SSAE-22 by using a “Question & Answer” format designed to provide practical discussion, advice, and specific implementation guidance for review engagements.
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GOVERNMENT HEADLINES:
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June 30 Year-Ends – New Edition of Governmental GAAP Update Service Discusses June 30 Year-Ends
We have published a new edition of the Governmental GAAP Update Service,
Getting Ready for June 30th Year-Ends. This new edition discusses what to consider for this June 30th year end and what to focus on for the upcoming fiscal year.
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