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Financial Reporting and the Law

On December 8 and 9, staff members of the SEC’s Office of the Chief Accountant, including the SEC chief accountant in his first published speech since he arrived at the SEC, discussed various accounting and financial reporting matters at the American Institute of CPAs’ annual conference, including the following:

  • International Financial Reporting Standards (IFRS)—The chief accountant noted that “it appears that U.S. constituents generally are not supportive of full adoption [of IFRS] for a variety of reasons” and have concerns about providing an option to U.S. companies to present IFRS-based financial statements. Therefore, “in the coming months,” he hopes to begin discussions with the SEC commissioners about alternative ways for U.S. issuers to use IFRS, such as by presenting IFRS-based financial information supplementally without the disclosures and reconciliation required for non-U.S. GAAP financial measures.
  • Further Convergence of IFRS and U.S. GAAP—The chief accountant noted that he favors convergence of standards and encourages the FASB and the International Accounting Standards Setting Body (IASB) “to continue to work towards converged standards, including on lease accounting.”
  • Revenue Recognition—The chief accountant noted that there are various implementation issues that the FASB and the IASB are addressing, including the identification of performance obligations and the accounting for licenses. Some may require additional guidance from the FASB or the SEC staff, which may affect the effective date of that standard.
  • Audit Committee Disclosures—The chief accountant noted that he “has devoted substantial time” to Chair Mary Jo White’s request that the staff consider whether improvements to audit committee reporting requirements should be made. He noted that the enhancements that some audit committees have made to their disclosures may be partially responsive to investor requests but are not being made consistently.
  • Segment Reporting—An SEC deputy chief accountant made the following points:
    • “[T]he staff will be taking a refreshed approach when reviewing operating segment disclosures[.]”
    • Most companies have more than one operating segment.
    • The chief operating decision maker may not be the chief executive officer.
    • The identification of operating segments requires considering not only a company’s organizational structure and the package of information given to the chief operating decision maker, but also other factors, such as the way a company prepares budgets and forecasts and determines executive compensation.
    • The aggregation of operating segments requires
      • similar economic characteristics, where there is no bright line test, and
      • an analysis of each of the five areas identified in the accounting standard. Recently, the staff disagreed with a company’s aggregation of segments based on the staff’s analysis of the type or class of customer, which is one of those five areas.
  • Additional Information Available to Audit Committees—A deputy chief accountant noted that audit committees’ discussions with their auditors about performance criticisms included in PCAOB inspection reports could benefit from a new appendix that has been added to PCAOB inspection reports. The appendix identifies particular auditing standards that are the subject of performance criticisms in the inspection report.
  • Internal Control Over Financial Reporting—Once again, the SEC staff discussed its concerns that material weaknesses in internal control over financial reporting are not being identified on a timely basis, either because the weakness is not being identified at all or because the severity of the weakness is not being evaluated appropriately. A deputy chief accountant noted that the SEC staff’s efforts in the area of internal control over financial reporting are “ongoing, coordinated and increasingly integrated into [the staff’s] consultation, disclosure review and enforcement efforts.”