CAQ SEC Regulations Committee Releases Highlights of March 23, 2017, Joint Meeting With SEC Staff
On June 23, 2017, the Center for Audit Quality (CAQ) posted to its Web site the highlights of the March 23, 2017, CAQ SEC Regulations Committee joint meeting with the SEC staff. Topics discussed at the meeting include:
- SAB 74 disclosures1 — The Committee highlighted trends in SAB 74 disclosures for the three most significant new accounting standards, including revenue recognition, leases, and credit losses.2 Observations were based on reviews of recently issued 2016 Forms 10-K.Editor’s Note: The SEC staff indicated it is actively monitoring SAB 74 disclosures, which is evidenced by comments on recent Forms 10-K and registration statements. The following is an example of a recent SEC staff comment regarding the new revenue recognition standard:You state that you are in the process of evaluating the impact that the amended revenue recognition guidance in Topic 606 will have on your consolidated financial statements. Please revise to provide a qualitative discussion of the potential impact that this standard will have on your financial statements when adopted. In this regard, include a description of the effects of the standard that you expect to apply and a comparison to your current revenue recognition policies. Describe the status of your process to implement the new standard and the significant implementation matters yet to be addressed. In addition, to the extent that you determine the quantitative impact that adoption of Topic 606 will have on your results, please also disclose such amounts. Please refer to the SEC Staff Announcement made at the September 22, 2016, meeting of the FASB Emerging Issues Task Force Meeting Minutes and SAB Topic 11.M.In addition, the SEC staff’s public remarks, such as those of SEC Chief Accountant Wesley Bricker at the 13th Annual Life Sciences Accounting and Reporting Congress,3 highlight the importance of adequately assessing both the qualitative and quantitative effects of adoption, including the impact of new disclosures. The incremental disclosures upon adoption ASC 606 are significant, as emphasized in Deloitte’s February 22, 2017, Heads Up. For an analysis of recent trends in SAB 74 disclosures for the new revenue recognition standard, refer to Deloitte’s June 5, 2017, Heads Up. Registrants are encouraged not to overlook such disclosure requirements.
- Non-GAAP measures — The SEC staff noted an overall decline in comments on non-GAAP measures, which correlates with improvements it has observed in registrants’ compliance with guidance on non-GAAP measures. No new areas of focus were mentioned.
- Definition of a business — interaction between the new GAAP definition of a business and the SEC Regulation S-X, Article 11,4 definition — The FASB changed its definition of a business with the issuance of ASU 2017-01.5 The SEC staff confirmed that “the issuance of ASU 2017-01 did not affect [the application of] Article 11 of Regulation S-X.” For more information, see Deloitte’s January 13, 2017, Heads Up.
- The effects of accounting changes by a successor entity on the predecessor period financial statements — The Committee and SEC staff discussed the effect on predecessor-period financial statements of accounting changes by a successor, specifically when a different basis of accounting exists between the predecessor and successor because of a change in control, pushdown accounting, or fresh-start reporting. An example of a situation in which this issue may apply would be a transaction that occurs on November 15, 2017, that causes a change in basis requiring a successor/predecessor black line presentation, and the successor entity retrospectively adopts a new accounting standard effective January 1, 2018.This matter is particularly important in light of the significance of the new revenue recognition standard, among others, and the lack of comparability that exists if the predecessor-period financial statements are not adjusted. The SEC staff noted that paragraph 13210.2 of the SEC Division of Corporation Finance Financial Reporting Manual, which indicates that the need to reflect the impact of discontinued operations in predecessor periods, “does not apply to any other accounting changes and therefore, has no bearing on the analysis.” The SEC staff indicated it will further evaluate this matter.
- Adoption of ASC 606 when an emerging growth company (EGC) that elected private-company adoption dates ceases to qualify as an EGC — The Committee and SEC staff discussed the reporting implications for an EGC that elected private-company adoption dates and subsequently loses EGC status after a new standard's required adoption by public business entities but before the required adoption date for private companies. The SEC staff indicated it will further evaluate this matter.
- Electronic submission of prefiling correspondence — “The staff indicated that when submitting interpretive requests, waiver requests and similar pre-filing correspondence, electronic submission (via an email to CF-OCA at firstname.lastname@example.org) is sufficient and submission of paper documents is not necessary.”
SEC Staff Accounting Bulletin (SAB) 74 was codified as SAB Topic 11.M, “Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Period.”
The new accounting standards for revenue recognition, leases, and credit losses are FASB Accounting Standards Codification (ASC) Topic 606, Revenue From Contracts With Customers; FASB Accounting Standards Update (ASU) No. 2016-02, Leases; and ASU 2016-13, Measurement of Credit Losses on Financial Statements, respectively. Note that when effective, ASU 2016-02 will supersede ASC 840, Leases, and add ASC 842, Leases.
For more information, see Deloitte’s April 4, 2017, Financial Reporting Alert.
SEC Regulation S-X, Article 11, "Pro Forma Financial Information.”
FASB Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business.