Out in Front of SAB 74

As Carol used to emphasize when she was Chief Accountant in CorpFin, and still does every chance she gets, SAB 74 disclosures are an important issue to the Staff.  This disclosure requirement about recently issued accounting standards is codified in Topic 11-M of the SAB codification, which you can find here.

As we have recently passed first quarter end, and the FASB is actively working to finalize the new Revenue Recognition standard, this might be a good time to proactively begin drafting SAB 74 disclosures for this new standard, just in case it is issued before you file your 10-Q for the quarter ended March 31 (or whenever your next filing is due).

This posting will summarize the requirements and talk about a couple of the challenging issues they present.

In our next post we will talk about why they seem to be duplicated in the financial statements and MD&A, a frequent complaint about copy and paste disclosure duplication.

The SAB essentially considers a new standard to be a “known trend” in the context of the MD&A requirements, that is something that you can “reasonably expect” to have a future impact.  In essence the enactment of the standard by the FASB creates a requirement to make a forward-looking disclosure because you know it will make the past not be indicative or predictive of the future.

The SAB states that your disclosure could generally include four components:

“A brief description of the new standard, the date that adoption is required and the date that the registrant plans to adopt, if earlier.

A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by the registrant, if determined.

A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable. In that case, a statement to that effect may be made.

Disclosure of the potential impact of other significant matters that the registrant believes might result from the adoption of the standard (such as technical violations of debt covenant agreements, planned or intended changes in business practices, etc.) is encouraged.”

These disclosures are generally pretty straightforward, but one issue that does come up frequently is companies saying they are not sure of the future impact of a new standard when they are in the period just before adoption is required.  If you are close to the adoption date, for example filing a 10-K in March when you are adopting in that quarter, seems likely you should have some idea of the impact.

Another issue that we hear from many participants is about including information about new standards that do not impact their companies at all.  And, there is no requirement to do this!  The SAB actually says:

“The staff believes that this disclosure guidance applies to all accounting standards which have been issued but not yet adopted by the registrant unless the impact on its financial position and results of operations is not expected to be material.”

So, if it does not have a material impact, it can be omitted.  In these days of reducing unnecessary disclosures, this is one to think about! We’ll give some tips on what to do if someone, aka your auditor, tells you that you need a complete list.

That is our brief review of SAB 74 issues in advance of the new revenue recognition standard.  Since we know it is out there, seems like we might as well get ready!

Meanwhile, any thoughts on why this disclosure is usually in both the financial statements and MD&A?  And we’ll answer the age old question: have you ever seen SAB 74 disclosure that is good, or at least decent? We will discuss both questions next time, so stay tuned!

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