Tag Archives: CAQ

A Very Picky Reminder – ICFR and Accounting Standard Implementation Reporting

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By: George M. Wilson & Carol A. Stacey

SAB 74 (SAB Codification 11-M) disclosures surrounding the new revenue recognition, leasing and financial instrument impairment standards have been receiving a lot of attention lately, especially with the SEC Staff announcement about them at the September EITF meeting.

This is not the only reporting that a new accounting standard might involve. Since these new standards could have an impact on ICFR, this is a good time to remember the requirements to report material changes in ICFR. These requirements apply to both Item 9A in Form 10-K and Part I Item 4 in Form 10-Q. They begin with S-K Item 308(c):

(c) Changes in internal control over financial reporting. Disclose any change in the registrant’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of §240.13a-15 or 240.15d-15 of this chapter that occurred during the registrant’s last fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

With changes to ICFR for revenue recognition for information about contracts and estimates, like stand-alone selling price and when control transfers, and changes to ICFR for capitalization of all leases, these new standards could require material changes to ICFR. Is this the type of change included in the S-K 308(c) disclosure requirement?

This is an excerpt from the ICFR C&DI’s, number 7, about SOX reporting which you can find here:

After the registrant’s first management report on internal control over financial reporting, pursuant to Item 308 of Regulations S-K or S-B, the registrant is required to identify and disclose any material changes in the registrant’s internal control over financial reporting in each quarterly and annual report. This would encompass disclosing a change (including an improvement) to internal control over financial reporting that was not necessarily in response to an identified material weakness (i.e. the implementation of a new information system) if it materially affected the registrant’s internal control over financial reporting. Materiality, as with all materiality judgments in this area, would be determined upon the basis of the impact on internal control over financial reporting and the materiality standard articulated in TSC Industries, Inc. v. Northway, Inc. 426 U.S. 438 (1976) and Basic Inc. v. Levinson, 485 U.S. 224 (1988). This would also include disclosing a change to internal control over financial reporting related to a business combination for which the acquired entity that has been or will be excluded from an annual management report on internal control over financial reporting as contemplated in Question 3 above. As an alternative to ongoing disclosure for such changes in internal control over financial reporting, a registrant may choose to disclose all such changes to internal control over financial reporting in the annual report in which its assessment that encompasses the acquired business is included.

The SEC Regulations Committee of the CAQ has also discussed a particularly intricate issue in this transition. What if you change your ICFR this year, but the change is for future reporting when you begin to report under the new standard next year? This issue is still in play, as this excerpt from the minutes discusses:

  1. Changes in ICFR in preparation for the adoption of a new accounting standard

Item 308(c) of Regulation S-K requires disclosure of changes in internal control over financial reporting (“ICFR”) during the most recent quarter that have materially affected or are reasonably likely to materially affect the registrant’s ICFR. The Committee and the staff discussed how this requirement applies to changes in ICFR that are made in preparation for the adoption of a new accounting standard when those changes are in periods that precede the date of adoption and do not impact the preparation of the financial statements until the new standard is adopted.

The staff indicated that they are evaluating whether additional guidance is necessary for applying the requirements of Item 308(c) in connection with the transition to the new revenue standard.

So, as you begin implementing systems and processes for these new standards, don’t forget this part of the reporting!

As always, your thoughts and comments are welcome!

News From the CAQ – Still no Simple Answer for the RevRec/S-3 Issue!

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Back in June of 2015 we posted about the Center for Audit Quality, or CAQ. This organization, which has its roots with the AICPA, advocates for issues surrounding public company auditing with the goal of building and maintaining the public’s trust in the auditing process. You can learn more about the CAQ at their web page.

One important part of the CAQ is the SEC Regulations Committee. This group meets regularly with the SEC Staff to discuss emerging issues in practice. The summaries of their meetings are generally very useful resources and reviewing them on a periodic basis can help deal with complex and emerging issues.

In their June meeting the Committee and the SEC Staff discussed one of the issues we have blogged about earlier in the summer, the impact of retrospective adoption of a new accounting standard (revenue recognition and leases of course!) on a registration statement filed after you file a 10-Q in the year of adoption but before the end of the year. It is conceivable that the S-3 could require applying the new accounting standard to an additional earlier year. (Check out this post if you need to refresh your memory.)

Here is the summary of discussion about this issue from the SEC Regulations Committee June meeting:

Requirement to provide restated financial statements when a Form S-3 registration statement is filed after the registrant has filed its first Form 10-Q reflecting full retrospective adoption of the new revenue standard

As a follow-up to a topic discussed at the March 2016 Joint Meeting, the Committee and the staff discussed Deputy Chief Accountant Wes Bricker’s remarks at the 2016 Baruch College Financial Reporting Conference on transition activities for the new revenue recognition standard. Specifically, the Committee and the staff discussed the provision in ASC 250-10-45-5 which indicates that “[a]n entity shall report a change in accounting principle through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so.” ASC 250-10-45-9 provides guidance on the term “impracticable.”

The staff indicated that they are available for consultation with registrants that have concluded it would be impracticable to revise one or more comparative prior periods, but they also noted that consultation is not required.

So, it is all still a bit grey!

As always, your thoughts and comments are welcome!

Leases and the Five-Year Selected Financial Data in Form 10-K

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Within the required retrospective transition method for the new lease accounting standard is a very familiar question:

Will we be required to revise all five years of the selected financial data presented in Item 6 of Form 10-K?

As you may already know the SEC formally granted relief in the five-year summary for companies that use a full retrospective implementation for the new revenue recognition standard. For leases, they have done exactly the same.

 

At the March SEC Regulations Committee meeting of the CAQ this issue was addressed and if you read the minutes of the meeting you will see the SEC Staff’s announcement that:

“The selected financial data table should follow the transition provisions of the ASU (i.e., the new leasing standard should be applied as of the beginning of the earliest comparative period presented in the financial statements).”

Thank you letters may be appropriate!

As always, your thoughts and comments are appreciated!

The CAQ – Why You Need to Know Who They Are!

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Do you know where the SEC initially stated their position about transitioning to the 2013 Revised COSO framework? It was in September of 2013. Here is the path to that announcement.

One of the topics we discuss in our workshops is the importance of the “CAQ” in the financial reporting process. The CAQ is an important source of information about current positions and developments at the SEC. Surprisingly, we frequently discover that many people are not very familiar with this organization.

So, what is the CAQ? It is, in long form, The Center For Audit Quality.

Their web page is thecaq.org

At their home page you can learn about who they are:

“The Center is an autonomous, nonpartisan, nonprofit group based in Washington, D.C. It is governed by a Board that comprises leaders from the public company auditing firms, the American Institute of CPAs and three members from outside the public company auditing profession. The organization is affiliated with the American Institute of CPAs.”

And what they do:

“The Center for Audit Quality is dedicated to enhancing investor confidence and public trust in the global capital markets by:

  • Fostering high quality performance by public company auditors;
  • Convening and collaborating with other stakeholders to advance the discussion of critical issues requiring action and intervention;
  • Advocating policies and standards that promote public company auditors’ objectivity, effectiveness and responsiveness to dynamic market conditions.”

One really important part of this organization is The CAQ SEC Regulations Committee. This group meets periodically with the SEC staff, generally once each quarter for the first three quarters of the year, and discusses current accounting and disclosure issues. The home page for the committee is:

thecaq.org/resources/caq-committees/sec-regulations

The minutes of these meetings are published on the Committee’s webpage and frequently contain information that, while sometimes fairly narrow, is helpful in the financial reporting process.

For example, it was at a CAQ meeting that the SEC Staff early on stated their position about the transition to the 2013 COSO Framework. Here is a link to those minutes: (Check out page 6)

thecaq.org/docs/reports-and publications/2013septembe25jointmeetinghls.pdf?sfvrsn=0

The most recent highlights of the SEC Regulations Committee meeting with the Staff are at:

www.thecaq.org/docs/default-source/sec-regulation-committee-hightlights/sec-regulations-committee-highlights-march-31-2015.pdf?sfvrsn=0

This meeting addressed issues ranging from the reporting implications of the FASB’s new consolidation standard, ASU 2015-02, to the application of S-X Rule 3-14 to real estate acquisitions in prior years for a registration statement.

Yes, many of the issues are narrow and technical, but we suggest you check the CAQ minutes each quarter as you get ready to close!

As usual, your comments and thoughts are appreciated!