By: George M. Wilson, SEC Institute

Cybersecurity risk is an important “hot topic” in period-end reporting. In our workshops we sometimes find that many people are not aware that the SEC has issued guidance about cybersecurity disclosures.

As a period-end reporting reminder, don’t forget to review CorpFin Disclosure Guidance Topic 2 as you address cybersecurity risk. The SEC, both at the staff and Commission level, have recently reiterated that they believe this guidance from 2011 is on-point for disclosure in the current environment. There have been some discussions about whether to move this from a CorpFin document to a more official Commission Release, but there has been no formal activity to date.

As you read the Disclosure Guidance Topic you will see it suggests that you should tailor information to your circumstances. Disclosure in Risk Factors (likely applicable for almost all companies!) is one issue, but disclosure may also be relevant in the Description of the Business, Legal Proceedings, MD&A and the Financials Statements.

Another reminder, Chairman Clayton’s remarks about cybersecurity risk also provide valuable insight into making appropriate disclosures in this complex area.

And, as a last thought, PLI is presenting a One-Hour Briefing titled “Integrating Enterprise Risk Management, Cybersecurity and Compliance in an Era of Big Data Breaches and Vulnerability” on February 13, 2018.

As always, your thoughts and comments are welcome!

By: George M. Wilson, SEC Institute

Here is a thought to incorporate as you draft your year-end Form 10-K or next 10-Q. It involves a topic that arises in almost all our workshops. We all know how frustrating it is to find parts of a 10-K that are simply duplicates of other parts. The idea of simply cutting and pasting information from one section to another really serves no disclosure purpose and makes documents less readable for investors.

At SECI’s New York Annual Forum in December 2017, a speaker from the Division of Corporation Finance commented that “cross references are wonderful!”.

Now, as a reminder, when the staff speaks they only provide their opinion, not an official SEC position. That said, cross references really are wonderful!

As always, your thoughts and comments are welcome!

By: George M. Wilson, SEC Institute

As prospects of a government shut-down loom, the SEC has published its “Operations Plan Under A Lapse In Appropriations And Government Shutdown”. Hopefully it will not have to be used, but just in case you can find some details of how certain operations will continue on page 12.

As always, your thoughts and comments are welcome!

By: George M. Wilson, SEC Institute

The new Tax Cuts and Jobs Act creates massive changes in taxation with deep, complex accounting and reporting ramifications. PLI is offering two programs to help you begin dealing with these changes.

First, on January 22, 2018 we will offer “The Tax Cuts and Jobs Act of 2017: Navigating the New Landscape”. This half-day program will be offered live in our New York training center and also via webcast.

For this program PLI has invited representatives from the Internal Revenue Service, the Department of the Treasury, the Senate Finance Committee and the House Ways and Means Committee to join our panel of tax experts and share their thoughts on the international and domestic implications of the tax reform package.

Topics discussed will include:

• Transitions tax on deferred foreign income
• New inclusion and deduction rules for “GILTI”
• New deduction for foreign-derived intangible income (“FDII”)
• New limitation on the deductibility of business interest
• New deduction for individuals owning qualified businesses, REITs and MLPs
• Other changes to the U.S. taxation of business income

As a follow-on to this program we will also offer a one-hour briefing on February 26, 2018 – “Tax Reform – Getting the Accounting and Disclosure Right!”

This One-Hour Briefing will help you effectively deal with the accounting and SEC reporting implications of the new Tax Act. Our panel will review the detailed requirements of the FASB’s Accounting Standards Codification to determine the timing and process for recording the effect of the new Act as well as the related new SEC guidance about recording provisional amounts with appropriate disclosures. They will also discuss in-depth the SEC reporting issues involved in making complex judgments about appropriate disclosures in Forms 10-K and 10-Q for all aspects of the Act.

Jay Hanson, former PCAOB Board Member and George M. Wilson, a Director at SEC Institute, will address topics including:

• SEC reporting and other disclosure considerations, including MD&A, risk factors and business-related disclosures
• The “enactment date” provisions of Accounting Standards Codification 740
• The provisions of Staff Accounting Bulletin No. 118 and the related new C&DI’s
• How the new law affects deferred tax assets and liabilities at the date of enactment
• How the new tax law affects income in the year of enactment
• Other possible financial statement impacts of the Act

As always, your thoughts and comments are welcome!

By: George M. Wilson, SEC Institute

One of the major challenges in 2017 year-end accounting arose late last year when President Trump signed the new Tax Act. In this post, we began outlining some of the accounting challenges created by this new Act.

To help us all along this path, on December 22, 2017, the SEC staff issued guidance after previewing it at various public forums and conferences. The guidance has two pieces:

Staff Accounting Bulletin (SAB) No. 118

Compliance and Disclosure Interpretation 110.02 – Item 2.06 of Form 8-K

SAB 118 discusses the staff’s views about applying the provisions of U.S. GAAP in initial accounting for the income tax effects of the Act. If a company’s accounting for the Act is not complete when issuing financial statements, the SAB provides for the use of “provisional amounts” with an appropriate “limited” measurement period to complete the accounting. Supplemental disclosures would also be required.

The new C&DI provides the following guidance clarifying that an adjustment to deferred tax assets as a result of the Act does not require an Item 2.06 Impairment Form 8-K. The C&DI does have some incremental guidance if companies use the measurement period approach in SAB 118.

Question 110.02

Question: Does the re-measurement of a deferred tax asset (“DTA”) to incorporate the effects of newly enacted tax rates or other provisions of the Tax Cuts and Jobs Act (“Act”) trigger an obligation to file under Item 2.06 of Form 8-K?

Answer: No, the re-measurement of a DTA to reflect the impact of a change in tax rate or tax laws is not an impairment under ASC Topic 740.  However, the enactment of new tax rates or tax laws could have implications for a registrant’s financial statements, including whether it is more likely than not that the DTA will be realized.  As discussed in Staff Accounting Bulletin No. 118 (Dec. 22, 2017), a registrant that has not yet completed its accounting for certain income tax effects of the Act by the time the registrant issues its financial statements for the period that includes December 22, 2017 (the date of the Act’s enactment) may apply a “measurement period” approach to complying with ASC Topic 740.  Registrants employing the “measurement period” approach as contemplated by SAB 118 that conclude that an impairment has occurred due to changes resulting from the enactment of the Act may rely on the Instruction to Item 2.06 and disclose the impairment, or a provisional amount with respect to that possible impairment, in its next periodic report. [December 22, 2017]

To learn more about the accounting and SEC reporting implications of the new Tax Act, join us on January 26 as we present a One-Hour Briefing titled, “Tax Reform – Getting the Accounting and Disclosure Right!”

As always, your thoughts and comments are welcome!

By: George M. Wilson, SEC Institute

Amidst all the activity and uncertainty about tax reform is the additional, potentially complex question: “How will this affect financial reporting?”

It is not too early to begin preparing to answer this question!

The starting point in this assessment is this part of ASC 740-10:

Changes in Laws or Rates

25-47     The effect of a change in tax laws or rates shall be recognized at the date of enactment.

25-48     The tax effect of a retroactive change in enacted tax rates on current and deferred tax assets and liabilities shall be determined at the date of enactment using temporary differences and currently taxable income existing as of the date of enactment.

For existing deferred tax assets and liabilities this change may have a significant impact because of this requirement in ASC 740-10-30-2:

30-2

The following basic requirements are applied to the measurement of current and deferred income taxes at the date of the financial statements:

1. The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated.

In other words, what this means is that at the date of enactment of the new tax law all deferred tax accounts will be remeasured to the new rates. The impact of this remeasurement will flow through current period tax expense. This impact on current period tax expense will even include remeasurment of deferred taxes related to items classified on OCI. As a result, it is likely that deferred tax assets will be reduced, resulting in higher tax expense, and deferred tax liabilities will also be reduced, resulting in lower tax expense.

Other areas that could be affected include:

How much disclosure will be appropriate at year end, especially in this uncertain environment?

How will the potential movement to a territorial system affect existing tax accounts and valuation allowances?

Will these changes result in repatriation of cash and if so what should be disclosed?

The legal profession is also focusing on this issue. In this post from TheCorporateCounsel.net there is mention of the potential write down of deferred tax assets and even discussion about whether this event may trigger in Item 2.05 Impairment 8-K.

We should all stay tuned to how the legislative process proceeds, and be ready with appropriate disclosures when it concludes.

As always, your thoughts and comments are welcome!

By: George M. Wilson, SEC Institute

On December 12, 2017, the SEC appointed a new Chair and four new members to the PCAOB. The new appointees are:

William D. Duhnke III – Chair

Robert Brown – Board member

Kathleen M. Hamm – Board member

James G. Kaiser – Board member

Duane M. DesParte – Board member

These appointments bring the board to its full complement of five members. Following the SOX requirements two of the appointees, Mr. Kaiser and Mr. DesParte, are accountants. Mr. Duhnke, Dr. Brown and Ms. Hamm have background as lawyers. All of the new Board members bring a variety of deep and relevant experience to the Board.

You can read about the appointments and find out more about the new members in this press release and in this statement from SEC Chair Clayton.

Meanwhile, the two nominations for the open commissioner positions at the SEC are still awaiting confirmation by the full senate.

As always, your thoughts and comments are welcome!

By: George M. Wilson & Carol A. Stacey

On October 23, 2017, the SEC formally approved the PCAOB’s new Auditor’s Reporting Standard, now AS 3101. The final PCAOB standard was submitted to the SEC for approval on July 19 and published in the Federal Register on July 28.

The new standard takes effect in two phases:

The first phase adds information to and modifies the format of the auditor’s report and is effective for audits of periods ending after December 15, 2017, this calendar year end. This change applies to all reporting companies.

The second phase, which adds information about critical audit matters (CAMs) to the auditor’s report, does not apply to EGC’s, and is effective:

For audits of large accelerated filer for fiscal years ending on or after June 30, 2019

For audits of all other companies to which the requirements apply for fiscal years ending on or after December 15, 2020.

The new Auditor’s Report requirements that will be effective this year, for periods ending after December 15, 2017, include these modifications:

• Auditor tenure – a statement disclosing the year in which the auditor began serving consecutively as the company’s auditor;
• Independence – a statement regarding the requirement for the auditor to be independent;
• Addressee – the auditor’s report will be addressed to the company’s shareholders and board of directors or equivalents (additional addressees are also permitted);
• Amendments to basic elements – certain standardized language in the auditor’s report has been changed, including adding the phrase “whether due to error or fraud,” when describing the auditor’s responsibility under PCAOB standards to obtain reasonable assurance about whether the financial statements are free of material misstatement; and
• Standardized form of the auditor’s report – the opinion will appear in the first section of the auditor’s report, and section titles have been added to guide the reader.

The second phase, with the later effective date, requires the auditor’s report to discuss critical audit matters, which are defined as:

“A matter that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and

(2) involved especially challenging, subjective, or complex auditor judgment.”

Chair Clayton, in a statement about the new standard, said:

I would be disappointed if the new audit reporting standard, which has the potential to provide investors with meaningful incremental information, instead resulted in frivolous litigation costs, defensive, lawyer-driven auditor communications, or antagonistic auditor-audit committee relationships — with Main Street investors ending up in a worse position than they were before.

I therefore urge all involved in the implementation of the revised auditing standards, including the Commission and the PCAOB, to pay close attention to these issues going forward, including carefully reading the guidance provided in the approval order and the PCAOB’s adopting release

As a thought question, it will be interesting to see how a company’s disclosures of Critical Accounting Estimates will relate to the auditor’s discussion of Critical Audit Matters. More about this in our next post!

As always, your thoughts and comments are welcome!

By: George M. Wilson & Carol A. Stacey

In this post about sustainability and ESG disclosures we compared two companies’ disclosures about the same topic, the use of water in their products. This comparison showed that without standards to guide companies as they prepare disclosures it is very difficult to draw conclusions about who is more effectively and economically using resources. The Sustainability Accounting Standards Board has been addressing this issue. Over the last few years they developed their provisional standards and sought feedback in input to their process. This has culminated in the release for comment of their Exposure Draft Standards for 79 industries. You can read more about the process here.
The Comment Period for the Standards is 90 days, ending on December 31, 2017.

As always, your thoughts and comments are welcome!

By: George M. Wilson & Carol A. Stacey

On October 11, we posted about the Treasury Department’s recently issued financial system report which contained a recommendation that the SEC move forward with the FAST Act’s requirement to review disclosures required by Regulation S-K.

Later that day, in the first open meeting of Chairman Clayton’s tenure, the SEC proposed amendments to “modernize and simplify disclosure requirements for public companies” to implement this FAST Act requirement. In a press release Chairman Clayton said:

“The FAST Act has given the Commission the opportunity to update our rules, simplify our forms, and utilize technology to make disclosure more accessible. An effective disclosure regime provides investors with the information necessary to make informed investment choices without imposing unnecessary burdens of time and money on issuers, and today’s action embodies that goal.”

The 253 page proposed rule deals with a number of areas, including:

Description of Property (Item 102)

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 303) – Year-to-Year Comparisons (Instruction 1 to Item 303(a))

Directors, Executive Officers, Promoters, and Control Persons (Item 401)

Compliance with Section 16(a) of the Exchange Act (Item 405)

Corporate Governance (Item 407)

Outside Front Cover Page of the Prospectus (Item 501(b))

Risk Factors (Item 503(c))

Plan of Distribution (Item 508)

Undertakings (Item 512)

Description of Registrant’s Securities (Item 601(b)(4))

Information Omitted From Exhibits (Item 601)

Material Contracts (Item 601(b)(10)(i))

Subsidiaries of the Registrant and Entity Identifiers (Item 601(b)(21)(i))

Incorporation by Reference – Item 10(d)

Securities Act Rule 411, Exchange Act Rule 12b-23 and Rule 12b-32 and Related Rules under the Investment Company Act and Investment Advisers Act Forms

Tagging Cover Page Data

Exhibit Hyperlinks and HTML Format for Investment Companies

The proposed rule would also make several similar changes to reports under the Investment Company and Investment Advisers Acts.

As you can see, the proposal addresses a significant number of areas! We will dive into these proposals in more depth in coming posts. We will, of course, also review the proposal in detail in our Annual Reporting Forums in Dallas, New York and San Francisco in November and December.

As always, your thoughts and comments are welcome!