Category Archives: Reporting

The PCAOB in Motion

Since the SEC’s appointment of an essentially entirely new board on November 8, 2021, the Public Company Accounting Oversight Board (PCAOB) has taken several steps that help auditors and companies begin to understand the future directions of audit oversight and standard setting.

In early 2022, the Board established two new advisory groups, the Investor Advisory Group and the Standards and Emerging Issues Advisory Group.  It approved charters for the groups on March 29, 2022, and on May 9, 2022, announced the members of each group and set dates for their first meetings.   The meeting summaries for the advisory groups can provide insight into areas the PCAOB may address in the future.

On June 7, 2022, the Board hired its first ever Investor Advocate.  This new role is expected to enhance engagement with investors and “amplify investor voices” in the activities of the PCAOB.

The Board also established new Standard-Setting and Research Agendas on May 4, 2022.  Included are several projects to update and modernize the “interim standards” adopted shortly after the PCAOB’s formation.

On June 21, 2022, the Board adopted amendments to its auditing standards designed to “strengthen requirements that apply to audits involving multiple audit firms.”  The amendments were developed after three comment solicitations and were formally approved by the SEC on August 12, 2022.  They will be effective for audits of financial statements for fiscal years ending on or after December 15, 2024.

On August 17, 2022 the Board released its latest Audit Committee Resource.  This PCAOB Spotlight document is designed to offer “questions that audit committees of public companies might want to consider as part of their ongoing engagement and discussion with their auditors, including how the auditors are responding to the financial reporting and audit risks posed by the current economic environment.”

In June 2022, the Inspections Division published its “Staff Overview for Planned 2022 Inspections.”  This document, which is relevant not just for auditors but for audit committees and investors, “highlights selected areas of planned 2022 inspection focus.”

On August 26, 2022, the PCAOB announced the signing of a “Statement of Protocol” with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China.  This document is a significant step in providing a process for the PCAOB to conduct inspections of Chinese audit firms and, if necessary, pursue investigations. 

Lastly, in a process that builds on these steps and provides insight into the overall direction of the PCAOB, on August 16, 2022, the Board published for comment a draft “Five-Year Strategic Plan for Protecting Investors.”  The plan sets out four goals which are consistent with its actions in recent months:

  • Goal 1:  Modernize Standards
  • Goal 2:  Enhance Inspections
  • Goal 3:  Strengthen Enforcement
  • Goal 4:  Improve Organizational Effectiveness

The momentum and direction of the PCAOB is becoming clear with its actions and Spotlight statements.  Each of these developments clearly fits with the elements of the draft Five-Year Strategic Plan.  This information can help auditors and companies as they plan and execute audits.

As always, your thoughts and comments are welcome.

SEC Adjusts JOBS Act Revenue Threshold for Inflation

The 2012 JOBS Act requires the SEC to adjust the Emerging Growth Company (EGC) revenue threshold for inflation every five years.  (If you would like a quick refresher about the “IPO On-Ramp” created by the JOBS Act, check out this summary at SEC.gov.)  In 2017, the first inflation adjustment increased the revenue threshold from $1,000,000,000 to $1,070,000,000.  On September 9, 2022, the SEC announced the second inflation adjustment, increasing the threshold to $1,235,000,000.  You can read more in this Press Release, which includes links to the Final Rule and Fact Sheet.

As always, your thoughts and comments are welcome!

SEC Charges VMware in “Reverse” Channel Stuffing Case

We have blogged about many SEC “pull forward” enforcement cases.  They all involve companies that “pull forward” orders scheduled for future periods to the current period to meet sales forecasts and expectations. (Check out this post for several example cases).  As the volume of these cases shows, “pull forwards” are a common way companies can try to mask revenue shortfalls.  Interestingly, in almost all these cases, there is no financial statement revenue recognition misstatement.  Goods are shipped and revenue is recognized in the proper period.  Most of these cases focus on companies not disclosing the impact of related management practices, including price reductions, extended payment terms and the potential impact on future period revenues.

In an interesting twist on this practice, on September 12, 2022, the SEC charged VMware with “managing” its backlog to move orders from current quarters to future quarters, the mirror image of a “pull forward.”  According to the SEC’s Accounting and Auditing Enforcement Release, this allowed VMware to meet revenue forecasts and related analysts’ expectations during a period where its business slowed relative to projections and its sales mix was shifting from a point in time license model to a revenue recognition over time subscription model.

The basis for this case is failing to disclose to investors how VMware “managed” its backlog.  Revenue was not misstated.  The case includes disclosures in Exchange Act reports, earnings calls and earnings releases. According to the AAER:

“Beginning with its Form 10-Q filed for Q1 FY19, VMware began disclosing in its filings that ‘[t]he amount and composition of [VMware’s] backlog will fluctuate period to period, and backlog is managed based upon multiple considerations, including product and geography,’ but the disclosure omitted material information regarding the discretionary nature of VMware’s backlog, the extent to which VMware controlled the amount of its backlog, and how backlog was used to manage the timing of the company’s recognition of total and license revenue. In actuality, VMware’s backlog practices during the relevant period were controlled for the purpose of determining in which quarters revenue would be recognized and had the effect of obscuring the company’s financial results and avoiding revenue shortfalls versus company financial guidance and analysts’ estimates in at least three quarters during FY20, as well as full-year FY20.”

The AAER focuses on disclosure:

“In making public statements regarding its backlog, VMware omitted material information regarding the extent to which the company controlled its quarter-end total and license backlog numbers through its use of discretionary holds, and the extent to which it used backlog to control the timing of revenue recognition generally. The managed backlog disclosure did not convey to investors the material information that backlog was used by VMware to manage the timing of revenue recognition based upon factors such as the company’s financial guidance and  analysts’ estimates. This information was necessary in order to make VMware’s statements regarding its backlog, in light of the circumstances under which they were made, not misleading.”

In key parts of the AAER, the SEC addresses materiality:

“VMware’s statements and omissions regarding its quarterly revenue and revenue growth, without disclosing the impact that the company’s discretionary backlog practices and revenue management had on reported revenue, materially concealed a substantial FY20 slowing in the company’s recognized revenue growth versus expectations. Reasonable investors would have considered the foregoing information to have been important in deciding whether to purchase VMware securities during the relevant period.”

“In addition, this was important information to analysts, who began questioning VMware’s backlog ‘drawdown’ following the company’s Q1 earnings call and continued to question the continual reductions in quarter-end backlog numbers throughout the remainder of the fiscal year. VMware recognized the materiality of the issue when preparing its Q&A scripts.”

VMware paid an $8,000,000 fine.  The company did not admit or deny the SEC’s findings.

As always, your thoughts and comments are welcome.

A Frequent SEC Comment – “Can You Prove it?”

In both offering documents and periodic reports companies frequently make assertions like the following, which appears in a Form S-1 Registration Statement for Doximity:

Overview

We are the leading digital platform for medical professionals, with over____ million members as of March 31, 2021, including more than ____% of physicians across all 50 states and every medical specialty.

(Note:  The numbers were left blank in the first draft registration statement submitted to the SEC.)

When companies make these sorts of assertions, the SEC will invariably ask for support, as the staff did in this comment:

Draft Registration Statement on Form S-1 submitted March 5, 2021

Prospectus Summary Overview, page 1

  1. You describe yourself as the “leading digital platform for U.S. medical professionals.” Please provide the basis for your characterization that you have a leading software platform and describe how this leadership is defined and/or determined. For example, it is not clear whether you are basing this on objective criteria such as market share based on revenues for competing software platforms in your industry.

As long as the company can support their assertion, these types of statements are acceptable disclosures.  In this case Doximity supported their assertion with this response and clarified disclosure:

Prospectus Summary

Overview, page 1

1.You describe yourself as the “leading digital platform for U.S. medical professionals.” Please provide the basis for your characterization that you have a leading software platform and describe how this leadership is defined and/or determined. For example, it is not clear whether you are basing this on objective criteria such as market share based on revenues for competing software platforms in your industry.

RESPONSE: The Company respectfully acknowledges the Staff’s comment, and advises the Staff that it has revised the disclosure on pages 1, 63, and 91 of the Amended Draft Registration Statement to address the Staff’s comment. The Company also advises the Staff that the Company is basing this on the number of U.S. physicians utilizing its platform compared to competing software platforms in its industry.

The clarified disclosure, which was included in an amended Form S-1, appropriately describes the measure the company uses to support its “leading” status:

Overview

We are the leading digital platform for U.S. medical professionals, as measured by the number of U.S. physician members, with over 1.8 million medical professional members as of March 31, 2021. Our members include more than 80% of physicians across all 50 states and every medical specialty.

As always, your thoughts and comments are welcome!

Check Out PLI’s inSecurities Podcast and our SEC Institute Newsletter

If you have not yet listened to PLI’s inSecurities Podcast, it is a wonderful way to keep up with current developments in securities regulation and company reporting.  You can find all episodes here.

The latest inSecurities episode features a discussion of our most recent SEC Institute Quarterly Newsletter, including a special Sarbanes-Oxley Act trivia quiz featuring Chris Ekimoff and Kurt Wolf, the podcast hosts, along with SEC Institute Workshop Leader George Wilson.  If you would like to subscribe to the SECI Newsletter, visit us at SEC Institute and scroll to the middle of the page to sign up!

As always, your thoughts and comments are welcome!

SEC Amends Whistleblower Rules

On August 26, 2022, the SEC amended its whistleblower program rules to incentivize whistleblower tips. As you can read in the related Press Release, the changes “allow the Commission to pay whistleblowers for their information and assistance in connection with non-SEC actions in additional circumstances” and “affirms the Commission’s authority to consider the dollar amount of a potential award for the limited purpose of increasing an award but not to lower an award.”

You can read more about the changes in the related Fact Sheet and final rule.

To date, the whistleblower program has paid out over $1.3 billion to 281 individuals.

As always, your thoughts and comments are welcome!

An Example SEC Comment – Litigation

In its December 31, 2020, Form 10-K, O’Reilly Automotive, Inc. included this disclosure about Litigation Accruals in it Summary of Significant Accounting Policies:

Litigation Accruals:

O’Reilly is currently involved in litigation incidental to the ordinary conduct of the Company’s business.  The Company accrues for litigation losses in instances where a material adverse outcome is probable and the Company is able to reasonably estimate the probable loss.  The Company accrues for an estimate of material legal costs to be incurred in pending litigation matters.  Although the Company cannot ascertain the amount of liability that it may incur from any of these matters, it does not currently believe that, in the aggregate, these matters, taking into account applicable insurance and accruals, will have a material adverse effect on its consolidated financial position, results of operations or cash flows in a particular quarter or annual period.

While this seems like an ordinary enough accounting policy, the use of the term “material” when talking about outcomes seems to qualify when probable losses are accrued.  This prompted the SEC to ask O’Reilly this question in a December 21, 2021, comment letter:

  1. It appears based on your disclosure that you only accrue for litigation losses that are material. Please tell us and revise your disclosure to clarify that your litigation accrual policy is in accordance with ASC 450-20-25-2.

The company’s response letter included this explanation and proposed revised disclosure:

Response:

The Company respectfully advises the Staff that it performs an analysis under the provisions of the FASB ASC Topic 450-20, Loss Contingencies (“ASC 450-20”) for all matters.  ASC 450-20 requires an estimated loss from a loss contingency to be accrued as a charge to income if both of the following conditions are met: (a) information as of the date of the financial statements indicates that it is probable (i.e., the future event is likely to occur) that one or more future events will occur confirming the fact that a liability had been incurred, and (b) the amount of the loss can be reasonably estimated.  If the reasonable estimate of the loss is a range, then condition (b) is still deemed to be met.  If an amount within the range appears at the time to be a better estimate of the loss than any other amount within the range, such amount shall be accrued.  However, if no amount within the range is a better estimate than any other amount, the lowest amount in the range shall be accrued.  In accordance with the above analysis, the Company accrues estimated losses as charges to income when the criteria in ASC 450-20-25-2 are met.

On the other hand, disclosure of the contingency, but no accrual, is required if there is at least a reasonable possibility that a loss or an additional loss will occur and either of the following conditions exist: (a) an accrual is not made for a loss contingency because the conditions described above are not met or (b) an exposure to the loss potentially exists in excess of the amount accrued.  If disclosure is required under either of these conditions, the Company discloses the nature of the contingency and an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made.

While the Company has consistently followed the guidance of ASC 450-20-25-2, in future filings the Company will revise its disclosure to clarify that its litigation accrual policy is in accordance with ASC 450-20-25-2.

The proposed revised disclosure is updated as follows:

Litigation accruals:

O’Reilly is currently involved in litigation incidental to the ordinary conduct of the Company’s business.  Based on existing facts and historical patterns, the Company accrues for litigation losses in instances where an adverse outcome is probable and the Company is able to reasonably estimate the probable loss in accordance with ASC 450-20.  The Company also accrues for an estimate of legal costs to be incurred for litigation matters.  Although the Company cannot ascertain the amount of liability that it may incur from legal matters, it does not currently believe that, in the aggregate, these matters, taking into account applicable insurance and accruals, will have a material adverse effect on its consolidated financial position, results of operations or cash flows in a particular quarter or annual period.

After this response the SEC sent their normal closing letter.

As always, your thoughts and comments are welcome!

An Example of a “Simple” Failure to Disclose Why Revenues Increased Costs – NVIDIA’s $5,500,000 Penalty

Most MD&A enforcement cases focus on a complex issue, failure to disclose a known trend or uncertainty.  In these cases (e.g., Sony, SeaWorld and Under Armour), company management knows of something that is “reasonably likely” to materially affect financial performance in the future but does not disclose this information to investors in a timely manner.  This disclosure is probabilistic and subjective.

The issue in the SEC’s recent enforcement against NVIDIA was far simpler.  As detailed in this May 6, 2022, Press Release and the related SEC Order, NVIDIA Corporation failed to disclose the causal factors behind material increases in revenues in 2018.  This disclosure failure resulted in a $5,500,000 penalty.

The foundation for this case is in Regulation S-K Item 303, language that was formerly part of Financial Release 36 (No. 33-6835) and Financial Release 72 (No. 33-8350):

Where the financial statements reflect material changes from period-to-period in one or more line items, including where material changes within a line item offset one another, describe the underlying reasons for these material changes in quantitative and qualitative terms.

This disclosure, which is one of the main objectives of MD&A as articulated in S-K Item 303 and Financial Release 72, is to provide material information to help readers “ascertain that past performance is indicative of future performance.”

As you can read in the SEC Order, NVIDIA, which sells powerful computer chips know as graphics processing units (or GPUs), generated material increases in revenue in 2018.  Specifically, gaming GPU revenue increased 52% and 25% for the second and third quarters of 2018, respectively.  Company management knew that a significant part of this increase was because cryptominers were buying gaming chips, even though the company had built a separate product line for these customers.  The company was also aware that cryptomining is a very volatile business.

In its Form 10-Q for the second and third quarters for 2018, NVIDIA did not disclose that cryptomining was a significant factor in gaming revenue growth.

Not disclosing this information meant that investors did not have necessary information to “ascertain that past performance is indicative of future performance.”

The SEC Order also focuses on NVIDIA’s failure to maintain effective disclosure controls and procedures.

The CorpFin review process has consistently emphasized the requirement to disclose qualitative and quantitative information about the causal factors behind financial statement changes.  The voice of the Enforcement Division is now reinforcing this message: failure to disclose material information about causal factors behind financial statement changes can result in significant penalties.

As always, your thoughts and comments are welcome!

The SEC’s Proposed Climate-Related Disclosures: Post Ten – Financial Statement Disclosures

In the first post in this series, we overviewed the three main areas addressed in the SEC’s Proposed Rule for climate-related disclosures:

  • Governance, strategy, risk and related disclosures outside the financial statements
  • Greenhouse gas emission disclosures and attestation requirements
  • Financial statement disclosures

As you may have heard and can read about in this Press Release, the comment period for this proposal ended June 17, 2022.

Subsequent posts in this series have addressed proposed disclosures for:

This post explores the proposed financial statement disclosures.  All companies would be required to make these disclosures.  In addition, they would be subject to the requirements of internal control over financial reporting.  The financial statement disclosure requirements fall into the following categories:

  • Climate-related disclosure instructions
  • Contextual information
  • Disclosure thresholds
  • Financial impacts of severe weather events and other natural conditions
  • Financial impacts related to transition activities
  • Expenditure to mitigate risks of severe weather events and other natural conditions
  • Expenditure related to transition activities
  • Financial estimates and assumptions impacted by severe weather events and other natural conditions
  • Financial estimates and assumptions impacted by transition activities
  • Impact of identified climate-related risks
  • Impact of identified climate-related opportunities

Climate-Related Disclosure Instructions

The general instructions for the proposed financial statement disclosures specify that they must be included in any filing that is required to include the disclosures proposed by Regulation S-K Subpart 1500 and also includes audited financial statements.  These would essentially be annual reports on Forms 10-K and 20-F and registration statements.  These disclosures would be included in a note to the financial statements and would be required for each period for which the company includes financial statements in its filing.

Contextual Information

 Disclosure would include:

  • How each metric was derived;
  • Descriptions of significant inputs and assumptions; and
  • Any related policy decisions.

Disclosure Thresholds

The proposed rule would require disclosure if the amounts described below are over 1% of the relevant financial statement line item or expenditure or capitalized cost category.   This test would be based on the sum of the absolute value of all related impacts.  This threshold would apply to all the following financial statement disclosures.

Financial Impacts of Severe Weather Events and Other Natural Conditions

Companies would be required to disclose the impact of severe “weather events and other natural conditions, such as flooding, drought, wildfires, extreme temperatures, and sea level rise.”  This disclosure would be for each affected line item in the financial statements.  In addition, separate disclosure would be required for negative and positive impacts.

The proposed rule provides these example disclosures:

“(1) Changes to revenues or costs from disruptions to business operations or supply chains;

(2) Impairment charges and changes to the carrying amount of assets (such as inventory, intangibles, and property, plant and equipment) due to the assets being exposed to severe weather, flooding, drought, wildfires, extreme temperatures, and sea level rise;

(3) Changes to loss contingencies or reserves (such as environmental reserves or loan loss allowances) due to impact from severe weather events; and

(4) Changes to total expected insured losses due to flooding or wildfire patterns.”

Financial Impacts Related to Transition Activities

Companies would disclose the impact of any efforts to reduce GHG emissions or otherwise mitigate exposure to transition risks.  Separate disclosure would be required for negative and positive impacts.

Expenditure to Mitigate Risks of Severe Weather Events and Other Natural Conditions and Expenditure Related to Transition Activities

Companies would separately disclose the aggregate amount of expenditure and the aggregate amount of capitalized costs incurred during the fiscal years presented to mitigate the risks from severe weather events and to reduce GHG emissions or otherwise mitigate exposure to transition risks.

Financial Estimates and Assumptions Impacted by Severe Weather Events and Other Natural Conditions and Financial Estimates and Assumptions Impacted by Transition Activities

Disclosure would be required concerning whether the estimates and assumptions used to produce the consolidated financial statements were impacted by exposures to risks and uncertainties associated with, or known impacts from, severe weather events and other natural conditions or by risks and uncertainties associated with, or known impacts from, a potential transition to a lower carbon economy or any climate-related targets disclosed by the company.

Impact of Identified Climate-Related Risks and Impact of Identified Climate-Related Opportunities

Companies would be required to disclose the impact of any climate-related risks, as defined in proposed regulation S-K Item 1502(a).  This information would be presented separately for physical risks and transition risks.  Companies could voluntarily disclose similar information for climate-related opportunities.

Summary

The complexity and related costs of measuring the amounts described above along with the challenges of the proposed measurement threshold have been the subject of comments in the SEC’s rulemaking process.

As always, your thoughts and comments are welcome!

For reference, here is proposed Regulation S-X Article 14:

Article 14 – Climate-related disclosure

  • 210.14-01 Climate-related disclosure instructions.

(a) General. A registrant must include disclosure pursuant to § 210.14-02 in any filing that is required to include disclosure pursuant to subpart 229.1500 of this chapter and that also requires the registrant to include its audited financial statements. The disclosure pursuant to § 210.14-02 must be included in a note to the financial statements included in such filing.

(b) Definitions. The definitions in § 229.1500 (Item 1500 of Regulation S-K) apply to this Article 14 of Regulation S-X.

(c) Basis of calculation. When calculating the metrics in this Article 14, except where otherwise indicated, a registrant must:

(1) Use financial information that is consistent with the scope of the rest of its consolidated financial statements included in the filing; and

(2) Whenever applicable, apply the same accounting principles that it is required to apply in preparation of the rest of its consolidated financial statements included in the filing.

(d) Historical periods. Disclosure must be provided for the registrant’s most recently completed fiscal year, and for the historical fiscal year(s) included in the consolidated financial statements in the filing (e.g., a registrant that is required to include balance sheets as of the end of its two most recent fiscal years and income statements and cash flow statements as of the end of its three most recent fiscal years would be required to disclose two years of the climate-related metrics that correspond to balance sheet line items and three years of the climate-related metrics that correspond to income statement or cash flow statement line items).

  • 210.14-02 Climate-related metrics.

(a) Contextual information. Provide contextual information, describing how each specified metric was derived, including a description of significant inputs and assumptions used, and, if applicable, policy decisions made by the registrant to calculate the specified metrics.

(b) Disclosure thresholds.

(1) Disclosure of the financial impact on a line item in the registrant’s consolidated financial statements pursuant to paragraphs (c) and (d) of this section (including any impacts included pursuant to paragraphs (i) and (j) of this section) is not required if the sum of the absolute values of all the impacts on the line item is less than one percent of the total line item for the relevant fiscal year.

(2) Disclosure of the aggregate amount of expenditure expensed or the aggregate amount of capitalized costs incurred pursuant to paragraphs (e) and (f) of this section (including any impacts included pursuant to paragraphs (i) and (j) of this section) is not required if such amount is less than one percent of the total expenditure expensed or total capitalized costs incurred, respectively, for the relevant fiscal year.

(c) Financial impacts of severe weather events and other natural conditions. Disclose the impact of severe weather events and other natural conditions, such as flooding, drought, wildfires, extreme temperatures, and sea level rise on any relevant line items in the registrant’s consolidated financial statements during the fiscal years presented. Disclosure must be presented, at a minimum, on an aggregated line-by-line basis for all negative impacts and, separately, at a minimum, on an aggregated line-by-line basis for all positive impacts. Impacts may include, for example:

(1) Changes to revenues or costs from disruptions to business operations or supply chains;

(2) Impairment charges and changes to the carrying amount of assets (such as inventory, intangibles, and property, plant and equipment) due to the assets being exposed to severe weather, flooding, drought, wildfires, extreme temperatures, and sea level rise;

(3) Changes to loss contingencies or reserves (such as environmental reserves or loan loss allowances) due to impact from severe weather events; and

(4) Changes to total expected insured losses due to flooding or wildfire patterns.

(d) Financial impacts related to transition activities. Disclose the impact of any efforts to reduce GHG emissions or otherwise mitigate exposure to transition risks on any relevant line items in the registrant’s consolidated financial statements during the fiscal years presented. Disclosure must be presented, at a minimum, on an aggregated line-by-line basis for all negative impacts and, separately, at a minimum, on an aggregated line-by-line basis for all positive impacts. Impacts may include, for example:

(1) Changes to revenue or cost due to new emissions pricing or regulations resulting in the loss of a sales contract;

(2) Changes to operating, investing, or financing cash flow from changes in upstream costs, such as transportation of raw materials;

(3) Changes to the carrying amount of assets (such as intangibles and property, plant, and equipment) due to, among other things, a reduction of the asset’s useful life or a change in the asset’s salvage value by being exposed to transition activities; and

(4) Changes to interest expense driven by financing instruments such as climate-linked bonds issued where the interest rate increases if certain climate-related targets are not met.

(e) Expenditure to mitigate risks of severe weather events and other natural conditions. Disclose separately the aggregate amount of expenditure expensed and the aggregate amount of capitalized costs incurred during the fiscal years presented to mitigate the risks from severe weather events and other natural conditions, such as flooding, drought, wildfires, extreme temperatures, and sea level rise. For example, a registrant may be required to disclose the amount of expense or capitalized costs, as applicable, to increase the resilience of assets or operations, retire or shorten the estimated useful lives of impacted assets, relocate assets or operations at risk, or otherwise reduce the future impact of severe weather events and other natural conditions on business operations.

(f) Expenditure related to transition activities. Disclose separately the aggregate amount of expenditure expensed and the aggregate amount of capitalized costs incurred during the fiscal years presented to reduce GHG emissions or otherwise mitigate exposure to transition risks. For example, a registrant may be required to disclose the amount of expense or capitalized costs, as applicable, related to research and development of new technologies, purchase of assets, infrastructure, or products that are intended to reduce GHG emissions, increase energy efficiency, offset emissions (purchase of energy credits), or improve other resource efficiency. A registrant that has disclosed GHG emissions reduction targets or other climate-related commitments must disclose the expenditures and costs related to meeting its targets, commitments, and goals, if any, in the fiscal years presented.

(g) Financial estimates and assumptions impacted by severe weather events and other natural conditions. Disclose whether the estimates and assumptions the registrant used to produce the consolidated financial statements were impacted by exposures to risks and uncertainties associated with, or known impacts from, severe weather events and other natural conditions, such as flooding, drought, wildfires, extreme temperatures, and sea level rise. If yes, provide a qualitative description of how the development of such estimates and assumptions were impacted by such events.

(h) Financial estimates and assumptions impacted by transition activities. Disclose whether the estimates and assumptions the registrant used to produce the consolidated financial statements were impacted by risks and uncertainties associated with, or known impacts from, a potential transition to a lower carbon economy or any climate-related targets disclosed by the registrant. If yes, provide a qualitative description of how the development of such estimates and assumptions were impacted by such a potential transition or the registrant’s disclosed climate- related targets.

(i) Impact of identified climate-related risks. A registrant must also include the impact of any climate-related risks (separately by physical risks and transition risks, as defined in
§ 229.1500(c) of this chapter), identified by the registrant pursuant to § 229.1502(a) of this chapter, on any of the financial statement metrics disclosed pursuant to paragraphs (c) through (h) of this section.

(j) Impact of climate-related opportunities. A registrant may also include the impact of any opportunities arising from severe weather events and other natural conditions, any impact of efforts to pursue climate-related opportunities associated with transition activities, and the impact of any other climate-related opportunities, including those identified by the registrant pursuant to § 229.1502(a) of this chapter, on any of the financial statement metrics disclosed pursuant to paragraphs (c) through (h) of this section. If a registrant makes a policy decision to disclose the impact of an opportunity, it must do so consistently for the fiscal years presented, including for each financial statement line item and all relevant opportunities identified by the registrant.

The SEC’s Proposed Climate-Related Disclosures: Post Nine – Greenhouse Gas Emissions Attestation Requirements

In the first post in this series, we overviewed the three main areas addressed in the SEC’s Proposed Rule for climate-related disclosures:

  • Governance, strategy, risk and related disclosures outside the financial statements
  • Greenhouse gas emission disclosures and attestation requirements
  • Financial statement disclosures

As you may have heard and can read about in this Press Release, the comment period for this proposal ended June 17, 2022.

Subsequent posts in this series have addressed proposed disclosures for:

This post explores the proposed attestation requirements for greenhouse gas emission disclosures.  As a reminder, greenhouse gas disclosures would be required for all companies in their annual reports on Forms 10-K and 20-F, with updates on Forms 10-Q and 6-K.  Smaller reporting companies would not be subject to the Scope 3 disclosure requirements.  The related attestation requirements would apply to accelerated and large accelerated filers.  The attestation requirements fall into the following categories:

  • Attestation
  • Attestation provider
  • Attestation report requirements
  • Additional disclosures
  • Voluntary attestation reporting

Attestation

For companies that are accelerated or large accelerated filers and are required to disclose Scope 1 and Scope 2 emissions the proposed rule would require an attestation report for those disclosures.  The specific requirements concerning the provider of the attestation report and the form of the report are described below.

The attestation requirement would not apply to the first year that Scope 1 and Scope 2 disclosures are required.  For the second and third years where Scope 1 and Scope 2 disclosures are provided, an attestation report providing “limited assurance” would be required.  For the fourth and following years a “reasonable assurance” report would be required.

The attestation report would be prepared using standards that are:

  • Publicly available at no cost;
  • Established by a body or group that has followed due process procedures; and
  • Broadly distributed for public comment.

A limited assurance report for years two and three would include words to the effect that “nothing came to their attention” of the attestation report provider that the information presented was not prepared in accordance with a chosen set of standards.  The process and procedures underlying this limited assurance report would be based on those standards.

If you would like to see an example of limited assurance on ESG information check out page 77 of Coke’s ESG report.  The last paragraph has the limited assurance report, which includes this language:

“Based on our review, we are not aware of any material modifications that should be made to the Schedule of Selected Sustainability Indicators for the year ended December 31, 2020, in order for it to be in accordance with the Criteria.”

In subsequent years when a reasonable assurance report would be required the provider would do more work and their report would say words to the effect that “in their opinion” the information presented has been prepared in accordance with the chosen set of standards.  This would be more like the report companies receive on their financial statements:

We have audited the accompanying consolidated balance sheets of The Coca-Cola Company and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareowners’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.

If a company provides voluntary assurance before the required transition date, it must comply with the requirements described below.

Attestation provider

The attestation report must be provided by a “GHG emissions attestation provider.”  The proposed rule provides a list of required characteristics that make a person or firm a “GHG emissions attestation provider.”  The list includes criteria to determine if a provider is an “expert” in GHG emissions by virtue of possessing significant experience and sufficient competence and capabilities and to determine if the person or firm is independent.  You can read more in the details of proposed S-K Item 1505 below.

Attestation report requirements

The attestation report would be included in the proposed “Climate-Related Disclosure” section in the filing.  The form and content of the report would follow the reporting standards in the standards used by the attestation provider.  The proposed rule includes a lengthy list of minimum requirements for the report including identification of the standards used, the level of assurance provided and a statement about independence.

Additional disclosures

In addition to the attestation report, disclosures would include:

  • Whether the attestation provider has a relevant license from any relevant licensing or accreditation body;
  • If applicable, identification of the licensing or accreditation body;
  • Whether the attestation provider is a member in good standing of the licensing or accreditation body;
  • Whether the attestation engagement is subject to any oversight inspection program(s);
  • If applicable which oversight inspection program(s);
  • Whether the attestation provider is subject to record-keeping requirements; and
  • If applicable, identify the record-keeping requirements and the duration of those requirements.

Voluntary attestation reporting

If a company that is not required to provide an attestation report does in fact provide such a report it must make several disclosures, including the identity of the provider, the standards used, the level of attestation, any relationship with the attestation provider and whether the provider is subject to an oversight program.

Summary

The complexity of the attestation process and the related costs have been the subject of comments in the SEC’s rulemaking process.  Our next post will explore the proposed S-X financial statement disclosure requirements.

As always, your thoughts and comments are welcome!

For reference here is proposed S-K Item 1505.

1505 Attestation of Scope 1 and Scope 2 emissions disclosure.

(a) Attestation.

(1) A registrant that is required to provide Scope 1 and Scope 2 emissions disclosure pursuant to § 229.1504 and that is an accelerated filer or a large accelerated filer must include an attestation report covering such disclosure in the relevant filing. For filings made by an accelerated filer or a large accelerated filer for the second and third fiscal years after the compliance date for § 229.1504, the attestation engagement must, at a minimum, be at a limited assurance level and cover the registrant’s Scope 1 and Scope 2 emissions disclosure. For filings made by an accelerated filer or large accelerated filer for the fourth fiscal year after the compliance date for § 229.1504 and thereafter, the attestation engagement must be at a reasonable assurance level and, at a minimum, cover the registrant’s Scope 1 and Scope 2 emissions disclosures.

(2) Any attestation report required under this section must be provided pursuant to standards that are publicly available at no cost and are established by a body or group that has followed due process procedures, including the broad distribution of the framework for public comment. An accelerated filer or a large accelerated filer obtaining voluntary assurance prior to the first required fiscal year must comply with subparagraph (e) of this section. Voluntary assurance obtained by an accelerated filer or a large accelerated filer thereafter must follow the requirements of paragraphs (b) through (d) of this section and must use the same attestation standard as the required assurance over Scope 1 and Scope 2.

(b) GHG emissions attestation provider. The GHG emissions attestation report required by paragraph (a) of this section must be prepared and signed by a GHG emissions attestation provider. A GHG emissions attestation provider means a person or a firm that has all of the following characteristics:

(1) Is an expert in GHG emissions by virtue of having significant experience in measuring, analyzing, reporting, or attesting to GHG emissions. Significant experience means having sufficient competence and capabilities necessary to:

(i) Perform engagements in accordance with professional standards and applicable legal and regulatory requirements; and

(ii) Enable the service provider to issue reports that are appropriate under the circumstances.

(2) Is independent with respect to the registrant, and any of its affiliates, for whom it is providing the attestation report, during the attestation and professional engagement period.

(i) A GHG emissions attestation provider is not independent if such attestation provider is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that such attestation provider is not, capable of exercising objective and impartial judgment on all issues encompassed within the attestation provider’s engagement.

(ii) In determining whether a GHG emissions attestation provider is independent, the Commission will consider:

(A) Whether a relationship or the provision of a service creates a mutual or conflicting interest between the attestation provider and the registrant (or any of its affiliates), places the attestation provider in the position of attesting such attestation provider’s own work, results in the attestation provider acting as management or an employee of the registrant (or any of its affiliates), or places the attestation provider in a position of being an advocate for the registrant (or any of its affiliates); and

(B) All relevant circumstances, including all financial or other relationships between the attestation provider and the registrant (or any of its affiliates), and not just those relating to reports filed with the Commission.

(iii) The term “affiliates” as used in this section has the meaning provided in 17 CFR 210.2-01, except that references to “audit” are deemed to be references to the attestation services provided pursuant to this section.

(iv) The term “attestation and professional engagement period” as used in this section means both:

(A) The period covered by the attestation report; and

(B) The period of the engagement to attest to the registrant’s GHG emissions or to prepare a report filed with the Commission (“the professional engagement period”). The professional engagement period begins when the GHG attestation service provider either signs an initial engagement letter (or other agreement to attest a registrant’s GHG emissions) or begins attest procedures, whichever is earlier.

(c) Attestation report requirements. The GHG emissions attestation report required by paragraph (a) of this section must be included in the separately captioned “Climate-Related Disclosure” section in the filing. The form and content of the attestation report must follow the requirements set forth by the attestation standard (or standards) used by the GHG emissions attestation provider. Notwithstanding the foregoing, at a minimum the report must include the following:

(1) An identification or description of the subject matter or assertion being reported on, including the point in time or period of time to which the measurement or evaluation of the subject matter or assertion relates;

(2) An identification of the criteria against which the subject matter was measured or evaluated;

(3) A statement that identifies the level of assurance provided and describes the nature of the engagement;

(4) A statement that identifies the attestation standard (or standards) used;

(5) A statement that describes the registrant’s responsibility to report on the subject matter or assertion being reported on;

(6) A statement that describes the attestation provider’s responsibilities in connection with the preparation of the attestation report;

(7) A statement that the attestation provider is independent, as required by paragraph (a) of this section;

(8) For a limited assurance engagement, a description of the work performed as a basis for the attestation provider’s conclusion;

(9) A statement that describes significant inherent limitations, if any, associated with the measurement or evaluation of the subject matter against the criteria;

(10) The GHG emissions attestation provider’s conclusion or opinion, based on the applicable attestation standard(s) used;

(11) The signature of the attestation provider (whether by an individual or a person signing on behalf of the attestation provider’s firm);

(12) The city and state where the attestation report has been issued; and

(13) The date of the report.

(d) Additional disclosures by the registrant. In addition to including the GHG emissions attestation report required by paragraph (a) of this section, a large accelerated filer and an accelerated filer must disclose the following information within the separately captioned “Climate-Related Disclosure” section in the filing, after requesting relevant information from any GHG emissions attestation provider as necessary:

(1) Whether the attestation provider has a license from any licensing or accreditation body to provide assurance, and if so, identify the licensing or accreditation body, and whether the attestation provider is a member in good standing of that licensing or accreditation body;

(2) Whether the GHG emissions attestation engagement is subject to any oversight inspection program, and if so, which program (or programs); and

(3) Whether the attestation provider is subject to record-keeping requirements with respect to the work performed for the GHG emissions attestation engagement and, if so, identify the record-keeping requirements and the duration of those requirements.

(e) Disclosure of voluntary attestation. A registrant that is not required to include a GHG emissions attestation report pursuant to paragraph (a) of this section must disclose within the separately captioned “Climate-Related Disclosure” section in the filing the following information if the registrant’s GHG emissions disclosures were subject to third-party attestation or verification:

(1) Identify the provider of such attestation or verification;

(2) Describe the attestation or verification standard used;

(3) Describe the level and scope of attestation or verification provided;

(4) Briefly describe the results of the attestation or verification;

(5) Disclose whether the third-party service provider has any other business relationships with or has provided any other professional services to the registrant that may lead to an impairment of the service provider’s independence with respect to the registrant; and

(6) Disclose any oversight inspection program to which the service provider is subject (e.g., the AICPA’s peer review program).