9.3 SAB Topic 11.M Disclosure Requirements
The SEC staff has continued to emphasize the importance of providing
investors with disclosures that explain the impact that new accounting standards are
expected to have on an entity’s financial statements (“transition disclosures”).4 Such disclosures include information that investors may need to determine the
effects of adopting a new standard and how the adoption will affect comparability
from period to period. Transition disclosures should include not only an explanation
of the transition method elected but also information about the impact that the
credit losses standard is expected to have on an entity’s financial statements. The
SEC staff has highlighted that, in the past, transparent disclosures about the
anticipated effects of a new standard in multiple reporting periods preceding its
adoption have prevented market participants from reacting adversely to significant
accounting changes. In addition, the staff has indicated that it expects to see
robust qualitative and quantitative disclosures about (1) the anticipated impact of
new standards and (2) the status of management’s progress with implementation as the
adoption date of the new standard approaches.
While much of the previous discussion of transition disclosures has
focused on the adoption of the new revenue and leasing standards, the SEC staff has
stated that similar considerations apply to the credit losses standard as well as
other significant new accounting standards.
The SEC staff has also reiterated that a registrant should provide
transparent transition disclosures that comply with the requirements of SAB Topic
11.M and has indicated that a registrant that is unable to reasonably estimate the
quantitative impact of adopting the credit losses standard should consider providing
additional qualitative disclosures about the significance of the impact on its
financial statements.
Connecting the Dots
SAB 74 Disclosures — Footnotes or
MD&A
Questions have arisen regarding whether an SEC registrant should provide SAB
74 disclosures in the financial statement footnotes or in its MD&A. On
the basis of informal discussions with the SEC staff on this issue, we
understand that the SEC would expect the following:
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If material, the SAB 74 disclosures should be included in the financial statement disclosures (in addition to MD&A).
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The determination of materiality would be based on specific facts and circumstances.
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The disclosures in MD&A could have additional information that is not included in the financial statement footnotes. For example, if there is significant uncertainty regarding the impact of a new accounting standard, the MD&A may provide additional forward-looking statements and ranges that may not be replicated in the footnotes.
These views are supported by other SEC staff announcements, including those
in the following guidance:
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ASC 250-10-S99-6 states (emphasis added in bold):The following is the text of SEC Staff Announcement: Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of a Registrant When Such Standards Are Adopted in a Future Period (in accordance with Staff Accounting Bulletin [SAB] Topic 11.M). [ASU 2017-03, paragraph 3]This announcement applies to Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers (Topic 606); ASU No. 2016-02, Leases (Topic 842); and ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.FN1 [ASU 2017-03, paragraph 3]SAB Topic 11.M provides the SEC staff view that a registrant should evaluate ASUs that have not yet been adopted to determine the appropriate financial statement disclosuresFN2 about the potential material effects of those ASUs on the financial statements when adopted. Consistent with Topic 11.M, if a registrant does not know or cannot reasonably estimate the impact that adoption of the ASUs referenced in this announcement is expected to have on the financial statements, then in addition to making a statement to that effect, that registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. In this regard, the SEC staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies that the registrant expects to apply, if determined, and a comparison to the registrant’s current accounting policies. Also, a registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. [ASU 2017-03, paragraph 3]__________________________________FN1 This announcement also applies to any subsequent amendments to guidance in the ASUs that are issued prior to a registrant’s adoption of the aforementioned ASUs. [ASU 2017-03, paragraph 3]FN2 Topic 11.M provides SEC staff views on disclosures that registrants should consider in both Management’s Discussion & Analysis (MD&A) and the notes to the financial statements. MD&A may contain cross references to these disclosures that appear within the notes to the financial statements.
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SAB Topic 11.M, which states:Facts: An accounting standard has been issued5 that does not require adoption until some future date. A registrant is required to include financial statements in filings with the Commission after the issuance of the standard but before it is adopted by the registrant.Question 1: Does the staff believe that these filings should include disclosure of the impact that the recently issued accounting standard will have on the financial position and results of operations of the registrant when such standard is adopted in a future period?Interpretive Response: Yes. The Commission addressed a similar issue and concluded that registrants should discuss the potential effects of adoption of recently issued accounting standards in registration statements and reports filed with the Commission.6 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.7 MD&A8 requires registrants to provide information with respect to liquidity, capital resources and results of operations and such other information that the registrant believes to be necessary to understand its financial condition and results of operations. In addition, MD&A requires disclosure of presently known material changes, trends and uncertainties that have had or that the registrant reasonably expects will have a material impact on future sales, revenues or income from continuing operations. The staff believes that disclosure of impending accounting changes is necessary to inform the reader about expected impacts on financial information to be reported in the future and, therefore, should be disclosed in accordance with the existing MD&A requirements. With respect to financial statement disclosure, GAAS9 specifically address the need for the auditor to consider the adequacy of the disclosure of impending changes in accounting principles if (a) the financial statements have been prepared on the basis of accounting principles that were acceptable at the financial statement date but that will not be acceptable in the future and (b) the financial statements will be retrospectively adjusted in the future as a result of the change. The staff believes that recently issued accounting standards may constitute material matters and, therefore, disclosure in the financial statements should also be considered in situations where the change to the new accounting standard will be accounted for in financial statements of future periods, prospectively or with a cumulative catch-up adjustment.__________________________________5 Some registrants may want to disclose the potential effects of proposed accounting standards not yet issued, (e.g., exposure drafts). Such disclosures, which generally are not required because the final standard may differ from the exposure draft, are not addressed by this SAB. See also FRR 26.6 FRR 6, Section 2.7 In those instances where a recently issued standard will impact the preparation of, but not materially affect, the financial statements, the registrant is encouraged to disclose that a standard has been issued and that its adoption will not have a material effect on its financial position or results of operations.8 Item 303 of Regulation S-K.9 See AU 9410.13–18.
Footnotes
4
See SAB Topic 11.M.