Washington, D.C.
Dec. 5, 2016
The Securities and Exchange Commission ("SEC" or "Commission"), as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission, individual Commissioners, or of the author's colleagues upon the staff of the Commission.
Good morning. It is a pleasure to be here with you today to share my thoughts on financial reporting matters.
High-quality financial reporting stems from high-quality accounting standards, thoughtful and diligent application of standards by preparers of financial statements, and thorough and objective auditing of those financial statements. I believe this is true both domestically and internationally, for financial statements prepared under U.S. GAAP[1] and under IFRS.[2] I'd like to focus my time today on our office's role in monitoring and reviewing the application of accounting standards, both under IFRS and U.S. GAAP. I will begin with a discussion of our involvement in IOSCO[3] Committee 1, followed by an overview of our activity this year related to accounting consultations.
As you may know, the Commission is one of the members of the Board of IOSCO. Securities regulators from around the world work within IOSCO to collaborate on issues of mutual interest and concern.[4] One of the Board's policy committees is the Committee on Issuer Accounting, Audit and Disclosure, otherwise known as Committee 1, which is dedicated to improving the development of accounting and auditing standards, and enhancing the quality and transparency of the information that investors receive from listed companies. Committee 1 also considers matters related to the application of these standards in practice.[5] As Wes mentioned earlier, I was recently elected as the new Vice Chair of Committee 1 to serve a two-year term, and I would like to share with you some of my thoughts about the important work of this committee as we look back over the past year and forward to the coming year.
Committee 1 engages in both policy work and work related to the application of standards. As part of its policy work, the committee looks for opportunities to provide views on matters relevant to investors. This work includes reviewing exposure drafts from the IASB,[6] the IAASB,[7] and the IESBA,[8] and providing comment letters setting forth the committee's consensus views on the important financial reporting matters being addressed by these international organizations. Committee 1's work also includes broader consideration of financial reporting matters and ways in which the committee can elicit useful information for investors. For example, Committee 1 work contributed to IOSCO's issuance earlier in 2016 of a statement on non-GAAP financial measures.[9] The Committee recently has spent time discussing the upcoming implementation by issuers of new accounting standards under IFRS and the importance of both thoughtful and diligent implementation and clear, transparent transition information for the benefit of investors around the world.
Committee 1 plays an important role in the area of monitoring the application of standards. It provides a forum for securities regulators to share their domestic experiences monitoring issuer compliance with IFRS and to grapple with complex IFRS issues. At least once per year, the committee also shares its views on IFRS application with representatives of the IASB under a Statement of Protocols between IOSCO and the IFRS Foundation.[10] Furthermore, OCA's efforts to address accounting consultations under IFRS, which I will discuss further in a few minutes, can inform, and are informed by, OCA's interactions with other national securities regulators.
Looking ahead as Committee 1 Vice Chair, I believe it will serve the committee well to consider the broad range of accounting, audit and disclosure matters that exist globally and where the committee can best spend its time to improve financial reporting for the benefit of investors. I believe it is important for Committee 1 to continue to have a strong and respected voice in the setting of accounting, auditing and ethics standards and to continue to provide views to the international standard-setting bodies that I've mentioned. I also believe it is important for us as a committee to continue sharing amongst ourselves our experiences in reviewing application of standards and to continue to contribute our perspectives on application of standards with organizations such as the IASB's IFRS Interpretations Committee. As a committee we also stand ready to assist the IOSCO Board with other endeavors on accounting, audit and disclosure and to provide the Board with the benefits of our knowledge and experience.
I will turn now to another aspect of OCA's work related to the application of standards, specifically our work on accounting consultations. Over our last fiscal year[11] we have responded to approximately 125 accounting consultation requests. These consultations come from a variety of sources, including registrants, industry groups, audit firms, the PCAOB,[12] other regulators, and other Divisions and Offices at the SEC, including the Divisions of Corporation Finance and Enforcement. These consultations cover a variety of topics, including existing and new GAAP, as well as IFRS. Our top three consultation topics over the fiscal year have been revenue recognition, business combinations, and financial assets.
About half of our accounting consultations over the past fiscal year were received directly from registrants. These registrants want their investors to get information that incorporates not only their best thinking but is also consistent with regulatory expectations. Roughly 30% of our consultations involve smaller registrants and audit firms, and I believe this is significant because the consultation process provides them with access to the same accounting and auditing insight within OCA that is accessible to larger registrants and audit firms. In addition, many large registrants that are leaders in their industries also consult with us. Since 2014, 30% of the Fortune 10 and 16% of the Fortune 100 have consulted with OCA on a pre-filing basis on an accounting matter.
Another significant source of OCA consultations is the SEC's Division of Corporation Finance. Included in the population of issuers subject to review by the Division of Corporation Finance are 525 filers with financial statements prepared under IFRS, representing a market capitalization of approximately $7.3 trillion,[13] or approximately 20% of the total market capitalization of SEC registrants. OCA handles consultation requests associated with IFRS accounting matters in the same manner as requests related to U.S. GAAP filers, which is particularly relevant in light of the largely converged significant new standards for revenue recognition and leases. For areas in which IFRS and U.S. GAAP are largely converged, I expect that in many instances, outcomes under IFRS and U.S. GAAP would be the same for similar fact patterns.
On the next panel, you will hear from OCA staff about some of the learnings from the accounting consultations we've addressed over the past year. I will give you a preview of the range of important issues and transactions that we have addressed.
First, I'll mention new GAAP and transition issues. Among the issues we've consulted on over the past year are those involving companies' preparations for adopting new accounting standards, including figuring out applicable effective dates (including for equity method investees) and making transition disclosures. You will hear in particular about the new standards on revenue recognition, credit losses and leases.
What about scoping issues? Determining which piece of accounting literature is applicable to a transaction or arrangement is a key question in determining the appropriate application of accounting standards. The next panel will talk about the growth in joint ventures, strategic alliances and other collaborative-type arrangements and the need to carefully consider which accounting literature should be applied in each situation.
Measurement issues can also be challenging. We have consulted on issues involving, among other topics, business combinations and measurement period adjustments, measurement of pension interest cost, and financial instruments and instrument specific credit risk.
In the area of presentation and disclosure, we have continued to consult on issues involving whether revenue should be presented on a gross or on a net basis. While most issues have been under existing U.S. GAAP, we have started to address issues under FASB Accounting Standards Codification Topic 606.
These are just a few of the issues we've consulted on over the past year and about which you'll hear more in the next panel. I want to thank all of the OCA speakers on the next panel, and OCA's Accounting Group staff in general, for their dedication and hard work over the past year.
In closing, and as I hope is evident from my remarks, the OCA staff is well-poised to engage in domestic and international accounting, audit and disclosure matters and to contribute both within the Commission and within IOSCO to serve our investor protection goals. We in OCA hope to further engage with companies and auditors over the coming year to ensure investors are getting the benefit of our collective best thinking in financial reporting matters.
Thank you for your time and attention.
[1] Generally Accepted Accounting Principles.
[2] International Financial Reporting Standards.
[3] International Organization of Securities Commissions
[4] See IOSCO's Objectives, available at http://www.iosco.org/about/?subsection=about_iosco.
IOSCO members have resolved:
[6] International Accounting Standards Board
[7] International Auditing and Assurance Standards Board
[8] International Ethics Standards Board for Accountants
[9] See https://www.sec.gov/servlet/Satellite/goodbye/Speech/1370550192129?externalLink=https%3A%2F%2Fwww.iosco.org%2Flibrary%2Fpubdocs%2Fpdf%2FIOSCOPD532.pdf.
[10] See http://www.iosco.org/library/agreements-with-other-institutions/IOSCO%20-%20IFRS%20Foundation%20Statement%20of%20Protocols%20for%20Cooperation%20on%20IFRS.pdf.
[11] Annual period ended 9/30/2016.
[12] Public Company Accounting Oversight Board.
[13] As of 9/30/2016